College costs keep rising, leaving students like you with a need to borrow money to finance your education. Make borrowing as inexpensive as possible by choosing a private student loan with a low interest rate. A lower interest rate can save you thousands of dollars over the life of the loan.
But how low do interest rates go? Is borrowing privately cheaper than borrowing federally?
Current Private Student Loan Interest Rates
1.99% - 8.56% 2.95% - 8.77% 1.74% - 5.64% 2.44% - 5.79% 2.39% - 6.01% 2.79% - 6.69% 2.43% - 7.84% 3.48% - 7.03% 2.56% - 6.87% 2.59% - 6.74% 3.24% - 5.54% 3.34% - 5.69%
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Variable Rates (APR)
Fixed Rates (APR)
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Current Federal Student Loan Interest Rates
Compare the rates above to the current federal student loan interest rates to see at a glance if you could save money by borrowing privately.
Unlike private student loans, federal student loans only come with fixed interest rates. For the 2019-2020 academic year, the federal student loan interest rate for undergraduates is 4.53%. It’s 6.08% for graduate student loans and 7.08% for Direct PLUS loans.
How Much Does the Interest Rate Really Matter?
An interest rate is the cost of borrowing. It’s what you must pay back in addition to the amount you borrowed for school. You should care about it because the lower your interest rate, the less money you’ll need to pay back.
Consider this example:
Suppose you borrow $30,000 for undergrad at a 6% interest rate with a 10-year loan term. You’ll end up paying $30,000 in principal plus $9,967.38 in interest for a grand total of $39,967.38. The cost of borrowing that $30,000 is $9,967.38.
If you borrow that same $30,000 with a 10-year loan term but at a 5% interest rate, the cost of borrowing is $8,183.59. By qualifying for or choosing the loan with the lower interest rate, you’ll save $1,783.79.
How Are Student Loan Interest Rates Determined?
Private student loan interest rates are competitive, changing monthly as the market changes and your credit score changes. Federal student loan interest rates are set each year on July 1st, staying the same through June 30th of the same year.
Private Student Loan Interest Rates
Private lenders typically offer you the choice of a fixed or variable interest rate. A fixed interest rate stays the same throughout the life of the loan while a variable interest rate changes throughout the life of the loan.
Private lenders determine the interest rate based on market factors and borrower characteristics like credit score and income. That’s why lenders run a credit check before determining your interest rate. It’s also why many students need a cosigner with good credit to get approved for a private student loan.
Advertised rates from private lenders change from month to month as the market changes. If you borrow a variable interest rate loan, the interest rate will also fluctuate from time to time. Many lenders base these fluctuations on a benchmark index rate like the London Interbank Offered Rate (LIBOR)—your variable interest rate does not fluctuate based on changes in your income or credit history.
Federal Student Loan Interest Rates
Federal student loan interest rates are set each year on July 1st and are based on the high yield of the 10-year U.S. Treasury note. A certain percentage then gets added onto this by Congress. The add-on amount depends on the loan type.
For example, in 2018 the high yield 10-year U.S. Treasury note was 2.995%. To calculate the interest rates for undergraduates 2.05% was added to 2.995%. This resulted in an interest rate of 5.05% for the 2018-2019 academic year. To determine the graduate rate, 3.60% was added, resulting in an interest rate of 6.60%.
Are Average Private Student Loan Interest Rates Low Enough to Save Me Money?
If you have excellent credit or a cosigner with excellent credit, borrowing privately could land you a better interest rate than the current federal student loan interest rates.
Private student loan interest rates range from around 4% to 13% for fixed interest rates and around 3.35% to 13% for variable interest rates. That means it’s possible to secure a lower interest rate on a private student loan than on a federal student loan, especially if you’re debating between a Parent PLUS loan and a private student loan.
Use this calculator to see how much you could save by refinancing
If you would like us to look further into your situation, please give us call at
Request a Call BackIt’s Not Just About the Interest Rate
When comparing private and federal student loans, you need to look at more than just the interest rate. Take the loan fees and loan term into account too as you calculate savings.
Loan Fees
A loan fee is simply a percentage of the total loan amount that gets paid to the lender instead of the college. For example, a 1% loan fee on a $10,000 means $100 goes to the lender and $9,900 goes to the college.
Undergraduate federal student loans and unsubsidized graduate student loans have a loan fee of 1.059%. Direct PLUS loans have a loan fee of 4.236%. The private lenders we work with charge zero loan fees.
When a loan comes with fees, you need to borrow more than you need, which means more money to pay back in the future.
For example, if you need exactly $9,000 to pay the college for the upcoming school year, you actually need to borrow this much:
With Federal Direct Undergraduate/Graduate Loans: You need to borrow $9,096.33. That way, $9,000 will go to the college and $99.33 will go to the federal government as the 1.059% loan fee.
With a Federal Plus Loan: You need to borrow $9,398.10. You’ll have the $9,000 you need for the upcoming year and the $398.10 you need for the 4.236% loan fee.
With a Private Loan: Assuming the lender charges zero fees, you only need to borrow $9,000.
Since you borrow more if you choose federal, you don’t need to beat the federal student loan interest rates to save money.
In fact, if you secure a private loan for $9,000 with no loan fee and a 10-year term length, you’ll save money so long as:
- The interest rate is lower than 4.760% compared to the federal Direct unsubsidized* undergraduate loan
- The interest rate is lower than 6.317% compared to the Direct graduate loan
- The interest rate is lower than 8.066% compared to the federal Plus loan
Loan Term
The loan term also influences your savings just as much as the interest rate does. The longer the loan term, the longer your loan is accumulating interest.
Suppose you need to borrow $5,000.
You could borrow $5,000 in unsubsidized undergraduate loans at a 4.53% interest rate with a 10-year loan term, leaving you with a total payback of $6,226.98.
Or, you could borrow $5,000 privately at that same 4.53% interest rate but with a 7-year loan term. This would save you $383.05.
Can’t get approved for that low of an interest rate? It might not be a problem.
Assuming you stick with the 7-year loan term, you’d just need to find an interest rate lower than 6.542% to save money compared to the federal student loan. You’d also need the room in your monthly budget for larger monthly payments.
Again, saving money doesn’t always mean securing a lower interest rate.
Calculate Savings with Our Student Loan Payment Calculator
Compare private student loan offers and federal student loans for yourself by using this student loan payment calculator. Input the loan amount, the term length, and the interest rate to see how much you’ll owe in interest and what your monthly payment will be.
Don’t Forget to Consider What You’re Giving Up…and Gaining
If you’re in a situation where borrowing privately is cheaper than borrowing federally, proceed with caution. Make sure you know what you’re giving up if you decide not to borrow federally.
Federal student loans come with borrower protections like income-driven repayment plans, interest forgiveness for subsidized loans, student loan forgiveness plans, death and disability discharge, and forbearance if you head back to school.
Seek out a private lender offering similar protections.
The best private student loan lenders offer:
- Low-interest rate loans with your choice of term length
- Flexible repayment options
- Death and disability discharge
- At least a 6-month grace period
- 25% autopay interest rate deduction
- Forbearance for economic hardship
Final Thoughts on Average Private Student Loan Interest Rates
Remember, average private student loan interest rates are just that—the average. You won’t know what rates you qualify for until you apply on your own or with a cosigner.
Also, even if you decide that private student loans fit your situation best, continue to file the FAFSA. It makes you eligible for other forms of financial aid like school-sponsored scholarships, federal work study, and grants. Plus, you’ll see how much you can borrow in unsubsidized and subsidized federal student loans.
