How to Manage Student Loan Interest Rates

Student Loan Interest Rates Can Fluctuate Year to Year

Young couple looking worried as they review a student loan statement while sitting in a coffee shop

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Student loan interest rates can determine what you'll pay to borrow money for school. For the 2021-22 academic year, rates for federal direct subsidized and unsubsidized loans have risen to 3.73% for undergraduate students.

Meanwhile, student loan interest rates for private loans reflect the interest-rate cuts the Federal Reserve enacted in early 2020. If you have student loans or plan to borrow, it's helpful to understand how to manage interest rates and where they might be headed next. 

Federal Student Loan Interest Rates

Federal student loan interest rates are set according to a formula established by Congress in the Higher Education Act of 1965. The rates for a new school year are based on the high yield of the 10-year Treasury notes sold in the final auction held before June 1. Various percentages are added to that yield percentage depending on the loan type and whether it's for an undergraduate or graduate school student. The following rates apply to new loans taken out for the 2021-22 academic year.

Undergraduate Borrowers Graduate or Professional Borrowers Parents and Graduate or Professional Borrowers
3.73% 5.28% 6.28%
Direct subsidized and unsubsidized loans Direct unsubsidized loans Direct PLUS

Rates for the 2021-22 academic year are significantly lower than rates from previous years but are up from the low rate of 2.75% of the 2020-21 school year. Student loan interest rates for direct subsidized and unsubsidized loans for undergraduates were 4.53% during the 2019-2020 academic year.

The March 2020 federal Coronavirus Aid, Relief and Economic Security (CARES) Act and subsequent executive orders reduced interest rates for borrowers with DOE-owned loans to 0%. This aid expires January 31, 2022. On March 31, 2021, the 0% interest rate was extended to Federal Family Education Loans (FFEL) but not to Perkins Loans owned by a party other than the DOE.

Federal Student Loan Rates: 2006-Present

Since 2006, federal student loan interest rates have increased and decreased in tandem with the movement of 10-year Treasury note movements.

Private Student Loan Interest Rates

Interest rates for private student loans aren't tied to the 10-year Treasury note. Instead, private student loan lenders can set rates based on several factors, including changes to a specific benchmark rate and the creditworthiness of individual borrowers.

Similar to federal student loans, private student loan interest rates were trending lower for 2020. Sallie Mae, for example, offers variable-rate loans at 1.13% to 11.23% and fixed-rate loans at 3.50% to 12.60%. Other private student loan lenders, including Discover, Citizens Bank, and Earnest, offer comparably low rates.

Unlike federal student loans, which update their rates once per year, rates for private student loans change at any time as lenders adjust to changes in the interest-rate landscape. However, the Federal Reserve may help bring some calm to any big student loan rate fluctuations.

In remarks delivered in August 2020, Fed chair Jerome Powell suggested that, in an attempt to manage economic impacts related to coronavirus, interest rates could remain low to protect the economy. If the federal funds rate and subsequently other benchmark rates such as the prime rate remain low, then private student loan borrowers could reap the financial benefits until rates creep up again.

If you're interested in private student loans, consider using an online marketplace to compare rate quotes from multiple lenders without affecting your credit. And use an online student loan calculator to estimate your monthly payments.

What Should You Do When Student Loan Rates Change?

It's important to remember that student loan rates can change as the interest rate environment changes. So, thinking ahead can help you better manage those shifts. 


If rates are lower than when you first accepted your loans, refinancing student loans could make sense if you want to lock in a better interest rate. Refinancing involves taking out new loans with a private lender to pay off your existing loans, whether federal or private. 

Refinancing private loans into a new private loan could make sense if it results in a lower interest rate. Or you may want to refinance a variable rate loan to a fixed-rate loan, which can create some predictability with your monthly payments.

However, if you use a private loan to refinance a federal student loan, you forfeit certain benefits and protections, including the temporary 0% interest rate and deferment or forbearance options. Refinancing federal loans into a private loan also means that you wouldn't be able to qualify for federal student loan forgiveness.

Student loan debt forgiven or discharged between 2021 and 2025 is tax-free, due to the American Rescue Plan of 2021.

Federal Consolidation

Consolidating federal student loans, on the other hand, allows you to keep those protections and retain your eligibility for student loan forgiveness. With consolidation, you streamline multiple federal loans into a single loan. Your interest rate reflects the average of the individual rates for each loan. 

Income-driven repayment plans can help make payments for federal loans more manageable. Keep in mind, however, that you have to recertify your eligibility for the program each year. 

Keep Your Loans the Way They Are

If you decide that now isn't the right time to refinance or consolidate student loans, take time to consider how changing rates might impact your budget. With fixed-rate loans, your payments and rate don’t fluctuate. But if you have any variable-rate private student loans, you could see your payment climb if the rate increases. Conversely, your monthly payment could drop if rates drop.

Reviewing your budget regularly can help manage your spending so that you are better prepared for fluctuations in your monthly payments. If your budget is tight, you could consider whether refinancing to a new loan might make sense. And if you plan to take out new federal loans in upcoming academic years, keep an eye on interest rate trends to see what a higher fixed rate could mean for your monthly payments. 

Key Takeaways

  • Student loan interest rates for both federal and private loans approached historically low levels in 2020.
  • Federal student loan interest rates are based on the yield of the 10-year Treasury note.
  • Individual lenders determine interest rates for private student loans.
  • Refinancing may be an option to consider when student loan interest rates are low because it may be able to save you money.
  • While rates are low, they aren't guaranteed to stay that way; borrowers should be prepared for eventual interest rate increases.