This makes federal student loans a good choice for many borrowers, but those with excellent credit and a high income (or a co-signer with those things) may qualify for lower rates on the private loan market.
The federal student loan rates for the 2022-23 school year are:
- Direct Subsidized and Unsubsidized Loans (undergrad students): 4.99%
- Direct Unsubsidized Loans (graduate students): 6.54%
- Direct PLUS Loans (parents or graduate students): 7.54%
Interest rates on these loans are updated each year in July. After a dip during Covid-19, rates have trended upward in the last two years.
Private Student Loans
Interest rates for private student loans fluctuate much more than their federal counterparts and are based on your credit profile, income and other factors. Here’s how you can qualify for the best rates, which may be lower than what you see on federal loans if you have strong credit.
1. Clean Up Your Credit
Your credit plays a big role in the interest rate you pay. The better your credit, the lower the rate you can qualify for. Check both your credit report and credit score to see where you stand. If your credit is poor or average, take steps to improve your credit before you submit an application.
2. Consider a Co-signer
If you aren’t able to improve your credit enough to qualify for desirable rates, consider asking a friend or relative to be a co-signer on your application. A co-signer is someone with strong credit who agrees to add their name to your loan. If you can’t make your payments as agreed, the co-signer is responsible for paying off your debt.
3. Compare Lenders
Each lender sets interest rates based on its own proprietary underwriting requirements. This means that some will offer you a better deal than others. That’s why it’s so important to shop around and compare private lenders to find the best rates you can qualify for.
4. Choose Between Fixed and Variable Rates
When you’ve chosen your desired lenders, you can submit applications and wait for approvals. Many private lenders allow you to choose between fixed- and variable-rate student loans when finalizing your deal.
Generally, variable rates start lower than fixed rates—but variable rates can change over the life of the debt. That means you could be stuck paying a higher rate later on, and your monthly payments may change as well. Fixed rates may start off higher, but they’re locked in for the life of the loan. That means they will never change and your monthly payment will remain constant.
5. Select the Right Repayment Terms
Your repayment timeline can also affect the interest rates you’re offered by private lenders. Many student lenders offer terms ranging from five to 15 years, though some will allow repayment for even longer.
Typically, shorter repayment terms come with lower interest rates. Plus, you’ll pay less interest simply because you’re in debt for a shorter period of time. However, your monthly payments will be larger with a shorter term.
Use a student loan payment calculator to play with different scenarios and estimate how much you’ll actually pay for a loan.
How Do Student Loans Work?
Students and their parents can borrow either private or federal student loans to pay for higher education. These loans can be used to pay for many school-related expenses, including:
- Room and board
- Books and school supplies
- Transportation costs
- Technology equipment such as a computer or related software
- Food, utilities and other common living expenses
Your exact repayment terms will vary based on your lender, but most student loans don’t enter repayment until after the student has left school. You can usually select a repayment term between five and 20 years, though longer repayment periods usually come with higher interest rates.
Federal vs. Private Student Loans
There are two broad categories of student loans: federal or private. Federal loans are offered by the U.S. Department of Education and, for most students, are the more attractive option. That’s because federal student loans offer things that most private lenders don’t, including:
- A fixed interest rate that isn’t based on your creditworthiness; all borrowers are offered the same standard rates
- More flexible repayment plans, including options that allow you to base your monthly payments on your income
- More lenient deferment and forbearance options
- Several loan forgiveness and loan discharge programs that you might qualify for
For these reasons, most borrowers turn to federal student loans first. However, private student loans can still be worthwhile in some circumstances. If you have excellent credit, for example, private student loans may offer better interest rates than the standardized federal rates. Private student loans can also be useful if you have gaps in your college funding and need extra cash.
The exact terms of private student loans vary by lender, but you can expect to find the following in many private loans:
- The ability to choose between fixed and variable interest rates
- A simpler application process
- Low or no origination fees
- The ability to add a co-signer if your credit isn’t sufficient