You’ve heard the horror stories. A borrower makes payments against their student loans for years, only to find that they still owe more than they originally borrowed in the first place. How does that happen?
It all comes down to interest. Compared to some other forms of debt, student loans have fairly high rates.
Why are student loan interest rates so high? Student loans are unsecured, and they’re given to students without lengthy credit histories, so they’re riskier than other forms of debt. However, there are some ways to reduce your interest rates and make your debt more manageable.
Current Student Loan Interest Rates
When it comes to student loans, there are two main types: federal and private.
Federal Student Loans
For several years, the interest rates on federal student loans were quite low. For example, rates for undergraduate student loans were as low as 2.75% from 2020 through 2021. But in the past year, rates have increased significantly.
In the table below, you can see the current interest rates on federal student loans and the rates for the previous two years.
| Rates for Loans Disbursed 7/1/2022 – 6/30/2023 | Rates for Loans Disbursed 7/1/2021 – 6/30/2022 | Rates for Loans Disbursed 7/1/2020 – 6/30/2021 | |
| Direct Subsidized | 4.99% | 3.73% | 2.75% |
| Direct Unsubsidized (Undergrad) | 4.99% | 3.73% | 2.75% |
| Direct Unsubsidized (Grad) | 6.54% | 5.28% | 4.30% |
| PLUS | 7.54% | 6.28% | 5.30% |
As you can see, there has been a sharp increase in rates over the past two years as the government tries to curb inflation.
Private Loans
Private student loans are issued by banks, credit unions, and financial institutions. Unlike federal loan interest rates, which Congress sets, rates are set by individual lenders. Rates can vary by lender, but these are the current rates ELFI offers on private student loans:
| Undergraduate | Graduate | Parent | |
| Variable | As low as 1.30% | As low as 1.30% | As low as 1.30% |
| Fixed | As low as 3.20% | As low as 3.20% | As low as 3.20% |
| Rates current as of July 14, 2022. | |||
Your interest rate on a private student loan depends on several factors, including your credit history, whether you have a co-signer, desired loan amount, and the repayment term.
Why Are Student Loan Interest Rates So High Compared to Other Debt?
As you start researching your student loan options, you may be surprised by how high the interest rates can be. Even some federal loans, well-known for low interest rates, can be expensive. For example, Parent PLUS Loans are now at 7.54%.
Student loan interest rates can be significantly higher than you’d see for other forms of debt, such as car loans and mortgages. Consider these numbers:
- The average interest rate for a car loan with a 60-month term was just 4.85% as of May 2022, the last available data.
- The average interest rate for a 30-year fixed-rate mortgage was 5.51% as of July 14, 2022.
Why is student loan interest so high compared to these forms of debt? There are a few reasons:
Student Loans Are Unsecured
Car loans and mortgages are secured loans, meaning they’re backed by collateral. For example, your car loan is secured by your vehicle; if you fall behind on your payments, the lender can take the car to recoup the money they lent to you.
By contrast, student loans are unsecured, and there is no collateral involved. A lender can take some measures to collect the money you owe them, such as late fees, collections, or legal proceedings, but they can’t take your property. Because there is no collateral, unsecured loans are riskier investments for the lender, and they charge a higher interest rate to offset that risk.
Student Loans Are Taken Out By Individuals Without Established Credit
As incoming college students, most student loan borrowers don’t have lengthy credit histories or high credit scores. Usually, they don’t have much in the way of income; they may have a part-time job or a side hustle, but they make significantly less than someone working full time.
The combination of uncertain credit and lower incomes make student loan borrowers riskier. Lenders charge higher rates to make the risk of lending to students worthwhile.
Student Loans Have Longer Terms
In general, loans with longer repayment terms have higher interest rates because there is a greater risk of the borrower falling behind on their payments over time.
For example, car loans tend to have repayment terms between two and seven years. But student loans have repayment terms as long as 20 years. Because the loan term is so much longer, lenders charge higher rates on student loans.
How to Lower Your Interest Rate
A common question borrowers have is, “Why are student loan interest rates so high?” Now that you know the answer, you can focus on reducing your loans’ interest rates with the following tips:
- Sign up for automatic payments: Many lenders, including federal student loan servicers, offer a 0.25% autopay discount when you agree to have your payments drafted from your bank account automatically each month.
- Refinance your loans: After you graduate, you can start earning a steady income and build your credit. Once you’ve established yourself, you may qualify for a lower interest rate by refinancing your student loans. Depending on your credit and the loan term you select, you could get a lower student loan refinance interest rate and save thousands over the life of your loan. Use the student loan refinance calculator to find out how much you can save.
- Add a co-signer to your refinancing application: If you can’t qualify for a lower interest rate on your own, you may be able to with the help of a co-signer. A co-signer is someone who agrees to make your loan payments if you can’t. Many lenders will offer a lower interest rate to borrowers with strong co-signers because it reduces the risk of the loan.
You can start the refinancing process by checking your eligibility and viewing rates using ELFI’s Find My Rate tool.