If you have student loan debt, your interest rate is a major factor in how much you ultimately pay. Fortunately, Congress sets your federal student loan interest rate each year and it remains fixed throughout the life of your loan.
The rate is set by the high yield of 10-year Treasury notes auctioned at the end of each 12-month period, plus 2.05 percentage points for undergraduate student loans, 3.60 percentage points for graduate student loans and 4.60 percent for PLUS loans.
Variable Rates
Interest rates on federal student loans are set and will not change throughout the duration of the loan. Private loans may have either a fixed or variable rate structure.
Fixed interest rates are ideal for borrowers who want to know their monthly payment amount and don’t want to worry about changes to their interest rate. However, keep in mind that interest rates on fixed-rate student loans tend to follow larger economic patterns.
Variable-rate student loans may carry more risk than fixed rate options, but they could save you money if the timing is right. With a calculator, you can estimate your monthly payments and total interest costs if your loan had a variable rate.
Borrowers who believe they can pay off their student loan quickly before interest rates increase significantly should consider variable-rate loans. Some lenders impose caps on variable interest rates to protect borrowers from excessive increases in payments.
Fixed Rates
Federal student loans feature a fixed rate, meaning your interest rate remains constant throughout the life of the loan. Unlike variable rates which can fluctuate due to changes in an index (like LIBOR), fixed rates remain fixed throughout the course of your loan.
When choosing between fixed and variable student loans, your financial goals and comfort level with risk must be taken into consideration. If you plan to pay off the loan quickly, a fixed rate might make more financial sense.
However, if you want to avoid higher payments as interest rates rise, a variable rate may be more appealing. But be sure to factor in how the market performs over time for this decision to become final.
Private lenders, who aren’t bound by government-set annual rates, typically follow national trends and adjust their rates from month to month. No matter the type of loan you have, paying attention to student loan payments is key when it comes to understanding interest rate fluctuations.
Interest Rate Factor
When applying for a student loan, interest rate is one of the most essential elements to take into account. It determines how much you’ll pay in interest and how long it will take to repay your loan.
A low interest rate can save you thousands of dollars in loan payments. However, your actual rate depends on several factors, such as the type of rate you have and your credit score.
The federal student loan interest rate is set annually and applies to all federal loans. Private student loans may also have variable or fixed rates.
The federal student loan interest rate is calculated by combining the high yield on a 10-year Treasury note with a fixed congressional premium, which is determined annually in May.
Reset Period
On July 1 of each year, the federal student loan interest rate is determined. It is based on a 10-year Treasury yield plus an additional amount. To cover administrative costs associated with running this program, the government adds on this premium.
Variable rates like mortgages, auto loans and student loans often reset each year to reflect changes in the market. They may be tied to benchmark rates like LIBOR (London Interbank Offered Rate), the federal funds rate or another index.
Reset rates may also be determined by the margin, or how much a lender charges to make a profit. This amount varies based on your credit history and the type of loan you have.
Due to the temporary nature of this reset period, student borrowers should plan ahead for when they resume making payments in 2022. They may also wish to consider refinancing their student loans if eligible.