Everything you need to know about the federal student loan interest rate.

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When you take out student loans, they come with an interest rate that determines the cost of borrowing that money. Federal student loan interest rates are applied to all student loans provided by the federal government rather than private lenders. 

Whether you already have student loans or you're considering taking one out, here's what you need to know about the federal student loan interest rate.

What is the federal student loan interest rate for the 2019-2020 school year?

The federal student loan interest rate for direct loans disbursed in the 2019-2020 school year is 4.53% for undergraduate students and 6.08% to 7.08% for graduate students and parents of undergraduate students. The interest rate for Perkins Loans is 5%.

Interest rates are fixed, meaning they don't change over the lifetime of the loan. The following interest rates are valid for loans disbursed on or after July 1, 2019 and before July 1, 2020.

Loan Type Borrower Interest Rate Loan Fees
Direct Subsidized and Unsubsidized Loans Undergraduate 4.53% 1.059% or 1.062%
Direct Unsubsidized Loans Graduate or Professional 6.08% 1.059% or 1.062%
Direct PLUS Loans Parents and Graduate or Professional Students 7.08% 4.236% or 4.248%

Loan fees are charged on federal student loans as a percentage of the overall loan amount. This fee is charged upfront, meaning it will have already been deducted from the funds you receive. However, you still have to repay the full loan amount that you borrowed, not just the amount you were given.

The federal student loan interest rate is set by federal law each year, and it changes slightly from year to year. The table below lays out the historical federal student loan interest rate for the past 10 years.

Disbursement Date Direct Subsidized Loans for Undergraduate Students Direct Unsubsidized Loans for Undergraduate Students Direct Unsubsidized Loans for Graduate Students Direct PLUS Loans for Graduate Students and Parents
7/1/18–6/30/19 5.05% 5.05% 6.60% 7.60%
7/1/17–6/30/18 4.45% 4.45% 6.00% 7.00%
7/1/16–6/30/17 3.76% 3.76% 5.31% 6.31%
7/1/15–6/30/16 4.29% 4.29% 5.84% 6.84%
7/1/14–6/30/15 4.66% 4.66% 6.21% 7.21%
7/1/13–6/30/14 3.86% 3.86% 5.41% 6.41%
7/1/11–6/30/13 3.40% 6.80% 6.80% 7.90%
7/1/10–6/30/11 4.50% 6.80% 6.80% 7.90%
7/1/09–6/30/10 5.60% 6.80% 6.80% 7.90%
7/1/08–6/30/09 6.00% 6.80% 6.80% 7.90%

Source: The U.S. Department of Education

How do student loan interest rates work?

Student loan interest rates are the percentage of your unpaid balance that you'll be charged for borrowing that money. In other words, the lower the interest rate, the more affordable the loan, generally speaking. 

The federal student loan interest rate is fixed, meaning it doesn't fluctuate throughout the life of the loan. Unlike with private loans, the federal student loan interest rate isn't determined based on the creditworthiness of the applicant. Rather, the federal rate is set each year and applies to all federal student loans, regardless of each borrower's credit history or financial status.

Private student loans may charge a variable interest rate, meaning that your interest rate can change over the life of the loan. Some private loans charge a fixed interest rate, while others charge a variable one, so it's important to know which one you're paying. What's more, private student loan interest rates usually vary from borrower to borrower and are determined based on factors like the applicant's credit history and income.

Federal student loans are daily simple interest loans, which is different from the compound interest formula that is often used by private lenders. Simple interest is calculated as a percentage of your principal, or the remaining balance of the money you actually borrowed -- it is, as it sounds, simple. As you chip away at your principal balance, interest charges will go down, and a greater portion of your monthly payments will go toward paying off your debt rather than paying fees.

Compound interest, which is often used by private lenders, is first calculated as a percentage of the principal, but then that interest is added to your principal. The following month, the interest charges will be calculated as a percentage of your principal plus the interest added from the previous month. Because the interest is continually added to the principal, it accrues faster and can result in a more costly loan. You'll still start to see more of your monthly payment going toward the principal as you chip away at your balance, but that shift will happen more slowly than it would with a simple interest loan.

To calculate the amount you'll pay in federal student loan interest, you can use the formula below. The interest rate factor is your loan's interest rate, expressed as a decimal, divided by the number of days in the year.

The formula for calculating simple daily interest on federal student loans:

Outstanding interest = (Outstanding balance × Interest rate factor) × Number of days since your last loan payment

When you make your minimum monthly loan payment, the money will first go toward paying off any outstanding interest, and then it will go toward the principal balance. If you pay more than the minimum to speed up your repayment process, the lender will decide how to allocate that payment between the principal, interest, and any other fees. Contact your lender if you plan to pay more than the minimum to make sure than any extra money goes toward your principal balance.

Average student loan interest rate

The average student loan interest rate is 5.8% across all student loans, according to a 2017 report from think tank New America. College Board research shows that 88% of those are federal student loans, as of the 2018-2019 school year.

The interest rate on federal student loans is lower than that of private student loans, which typically sits at around 7% to 12%. Fixed-interest loans had higher average interest rates than variable-interest loans. 

Refinancing student loans can lead to a lower student loan interest rate. The New America report showed that if all borrowers who qualified for refinancing did so, the average student loan interest rate would drop to 4.2%. It's worth noting that refinancing isn't beneficial for everyone, and refinancing federal student loans causes borrowers to lose protections like flexible repayment plans and loan forgiveness options.

The federal student loan interest rate changes from year to year, but on average, it's lower than the interest rate on private student loans. Paired with flexible repayment plans and loan forgiveness options, it's easy to see why borrowers tend to exhaust their options for federal loans before turning to private ones.

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