In 2023, the interest rates on student loans went up because the Federal Reserve increased interest rates to fight inflation. Despite this increase, the rates are still lower compared to rates from the past.
If you’re thinking of getting a new student loan, the interest rates for federal loans begin at 5.50%. Starting from August 2023, private student loans on Credible, a lending platform, have rates starting at 4.42%.
It’s important to carefully think about things before taking out student loans, especially during this uncertain economic time. President Joe Biden’s plan to forgive student loans was rejected by the Supreme Court in June. Moreover, Congress passed a law that stops extending the pause on loan payments. Interest will start adding up from September 1, 2023, and payments will be due in October.
Private Student Loan Interest Rates
Lenders that are not part of the government set a range for how much interest they will charge. The actual rate you get will depend on how good your credit is, and also on the credit of someone else who agrees to pay if you can’t.
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In the chart below, you can find the current rates from the loan website Credible. Starting from August 2023, the yearly interest rates (APRs) for fixed-rate private student loans on Credible begin at 4.42%. These rates show what many lenders on the website offer. Each lender will have their own range of rates, and these may be a bit narrower.
| Loan Type | Fixed APR | Variable APR |
|---|---|---|
| Undergraduate and Graduate | 4.42% to 16.99% | 5.13% to 16.99% |
| Refinance | 4.40% to 11.83% | 5.07% to 14.25% |
Federal student loans don’t care about credit scores or how much money you make, but private lenders do. If your credit score or income isn’t good enough, you’ll need someone else to help you pay, called a cosigner.
The Student Loan Ombudsman from the Consumer Financial Protection Bureau (CFPB) mentioned in a report from 2017 that over 90% of private student loans were given out with a cosigner.
But don’t worry if your credit score isn’t great or if you don’t have a cosigner. Some lenders offer student loans for people with bad credit and also student loans where you don’t need a cosigner.
Federal Student Loan Interest Rates
Between July 1, 2023, and June 30, 2024, new federal student loans for undergraduates have an interest rate of 5.50%. For new graduate student loans, the rate is 7.05%, and for new parent PLUS loans, the rate is 8.05% during the same period. These rates change every year.
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Payments for federal student loans were stopped, and interest rates were set to 0%. However, this is about to change. Congress made a law to stop extending the payment pause. Interest will start adding up again on September 1, 2023, and payments will need to be made starting from October.
There’s a fee called an origination fee of 1.057% for federal direct subsidized and unsubsidized loans. For parent PLUS loans, the origination fee is higher at 4.228%. But this fee isn’t added on top of what you need to pay back. Instead, it’s taken out of the money you get at the beginning.
College Enrollment Trends
Not as many people are signing up for higher education after high school.
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In the fall of 2020, colleges and universities reopened their classrooms and dorms after moving online due to the pandemic. But shortly after, they had to cancel sports and other activities again due to quarantines, which led to more online classes.
As the pandemic continued, it was expected that more people would go to community colleges, but the data showed that some big public universities saw more students enrolling, while community college enrollment dropped by as much as 30% in some places.
By the spring of 2022, the number of students in all post-secondary education dropped to about 16.2 million, which was 4.1% less than the previous year. This came after a 3.5% decrease the year before. Most of the decrease happened in students doing their first degree, which was down by 4.7% from the year before. The number of people in these programs was 9.4% less than before the pandemic.
Enrollment started getting steadier in fall 2022, but when you add up the number of people in undergraduate and advanced programs, it was still 5.8% lower than in 2019. By spring 2023, enrollment went down another 0.5%.
Student Debt Continues to Rise
After the big economic downturn in 2007–2008 known as the Great Recession, the money that states gave to support higher education dropped by a big 25%. Because of this, the part of the money that came from students went up from 36% in 2008 to 47% in 2012.
Because of this change, the total amount of money students owe in loans has gone over $1.6 trillion.
This debt might become even bigger if the education system has to face more money cuts and if fewer students join because of the ongoing pandemic.
The problem of student debt continues, but there are options for relief through programs that forgive student loans.
People who are trying to get their loans forgiven through the Public Service Loan Forgiveness (PSLF) program or by following an income-driven repayment (IDR) plan might have their remaining debt erased after they make 120 eligible payments.
How Is Student Loan Interest Calculated?
Both federal and many private student loans work out their interest using a basic method. This method involves taking your remaining main amount, multiplying it by the interest rate factor, and then multiplying that with the days since your last payment.
The calculation looks like this:
Interest Amount = (Remaining Principal Amount × Interest Rate Factor) × Days Since Last Payment
The interest rate factor helps decide the interest that builds up on your loan. It’s figured out by dividing your loan’s interest rate by the number of days in a year.
How Are Student Loan Interest Rates Calculated?
The interest rates for federal student loans are set by looking at the auction of the 10-year Treasury note in May. This is combined with a fixed increase that can’t go beyond a certain limit.
Here’s how it breaks down for different types of federal loans:
Direct unsubsidized loans for undergraduates: 10-year Treasury rate + 2.05%, with a highest cap of 8.25%
Direct unsubsidized loans for graduate students: 10-year Treasury rate + 3.60%, with a highest cap of 9.50%
Direct PLUS loans: 10-year Treasury rate + 4.60%, with a highest cap of 10.50%
On the other hand, private student loan interest rates are determined by each lender. They look at market conditions and how good the credit is for both the borrower and the cosigner. Many private lenders also provide variable interest rates, which usually change every month or three months based on things like the Secured Overnight Financing Rate (SOFR), which is related to overnight lending rates.
