How To Manage Student Loan Interest Rates

Student loan interest rates can determine what you'll pay to borrow money for school. For the 2021-2022 academic year, rates for federal direct subsidized and unsubsidized loans were 3.73% for undergraduate students. Knowing your interest rate and the options you have for repaying your student loans can help you make smart decisions when borrowing.

Meanwhile, student loan interest rates for private loans may reflect the Federal Reserve's interest rate cuts enacted in early 2020. However, in March of 2022, the Fed began hiking interest rates to combat inflation, which may push private loan rates higher in 2022 and beyond. If you have student loans or plan to borrow, it's important to monitor the trajectory of interest rates.

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 applied to new loans taken out for the 2021-2022 academic year.

Rates for the 2021-22 academic year were 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.

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. The Federal Reserve's switch to tighter monetary policy in March of 2022—by hiking the federal funds rate—will likely affect other benchmark rates, such as the prime rate. As a result, private student loan rates may creep up again in later 2022 and beyond.

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. 

Refinancing

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.

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. 

Keep Your Loans the Way They Are

If you decide that now isn't the right time to refinance or consolidate student loans, 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 the upcoming academic years, keep an eye on interest rate trends to see what a higher fixed rate could mean for your monthly payments.