A question mark and different percentage rates printed on note cards in a messy pile.

Image source: Getty Images

Student loan interest rates are determined by several factors that depend on the type of loan and the particular lender that is making it. Federal student loan interest rates are determined by market conditions, while private student loan interest rates are more dependent on the qualifications of the borrower.

With that in mind, here’s a rundown of what student loan borrowers need to know about where their interest rates come from.

Federal vs. private student loans

When it comes to student loans and the qualification processes involved with them, there are two broad categories -- federal student loans and private student loans.

Federal student loans include both subsidized and unsubsidized Direct loans, which are typically what are thought of when “federal loans” is mentioned, as well as PLUS loans made to parents and graduate students. These are guaranteed by the federal government, and therefore have an application and qualifying process that’s rather different than most other types of loans.

On the other hand, private student loans are those made by private lenders to students and their parents and do not have any sort of government backing. Unlike federal student loans, borrowers apply for and qualify for these loans much like they would a traditional loan. It’s important to realize that these are two completely different types of student loans.

Federal student loan interest rates and fees

Because they are guaranteed by the federal government, each type of federal student loan has the same interest rate, regardless of the borrower’s credit qualifications. These interest rates can change yearly and are based on the 10-year Treasury note yield. In other words, if we’re in a generally higher-interest environment, federal student loan interest rates will be higher than if we’re in a low-rate environment.

As I mentioned, these are set annually. Specifically, Congress sets the student loan interest rates each spring, and they are in effect for the entire school year (defined for the 2018-19 school year as loans disbursed on or after July 1, 2018 and before July 1, 2019).

Here’s a quick guide to federal student loan interest rates for the 2018-19 school year:

Loan Type

2018-19 School Year Interest Rate (Fixed)

Undergraduate Direct Subsidized and Unsubsidized Loans


Graduate Direct Loans (Unsubsidized)


PLUS Loans (Parents and Grad Students)


Data source: studentaid.ed.gov.

In addition to these interest rates, federal loans also have an origination fee (the government calls this a “loan fee”) that is deducted from the proceeds of the loan. For the 2018-19 school year, this fee is 1.062% of the loan amount for Direct subsidized and unsubsidized loans and 4.248% for Direct PLUS loans.

In other words, if you obtain a Direct subsidized loan for $2,500, the amount that will actually be paid to your school will be $2,473.45 after the loan fee is deducted.

Private student loan interest rates

Because they are not guaranteed by the government, private student loan interest rates are based on borrower qualifications and are not the same for all borrowers.

There are several factors that can be used to determine the interest rate you’re offered on a private student loan, so here’s a rundown of the biggest factors and what you need to know about each:

  • Credit history -- While lenders have different credit standards, when you apply for a student loan through a private lender, it’s fair to assume they expect you (or your co-signer) to have a solid credit history. Now, this doesn’t mean that you need to have excellent or top-tier credit, although all other factors being equal, a higher credit score will typically translate to a lower APR on your student loan. Instead, lenders generally want to see that you pay your bills on time each month and don’t have any collection accounts, charge-offs, or judgements on your credit report.
  • Employment situation -- Stable employment (or an offer of employment) is often a big factor in the student loan decision making process. Lenders not only want to see that you’re employed, but that you’ve been consistently employed in the same field with no major breaks. If this isn’t the case, it can be seen as an additional risk factor and can result in a higher interest rate.
  • Income -- It’s important to clarify that income and employment are two different things. For example, you can have a high income but an unstable employment situation. Even so, lenders want to see that you or your co-signer have enough income to cover your loan payments.
  • Other debts -- Lenders want to see that you and your co-signer can handle all of your debt payments. If you have an excessive level of other debts, it could prevent you from getting approved for a private student loan, even if your credit history, employment situation, and income are up to par.
  • Degree status -- Many lenders, particularly when you’re talking about refinancing student loans, consider how far along you are in your education. Some want to see that you’ve completed your degree before they’ll even consider your refinancing application, while others view the possession of an advanced degree as an indicator of commitment and responsibility.
  • Lender’s APR range -- So far we’ve discussed factors that have to do with you, the borrower. There are also lender-specific factors that determine your interest rate. Most significantly, each private student lender has its own maximum and minimum APR range that narrows down the interest rates you could get to a relatively small window. For example, if a particular lender’s APR range is currently 6% to 10% for private student loans, it doesn’t matter how phenomenal your loan qualifications are -- your APR won’t be below 6%.
  • Loan length -- In general, a longer repayment term will result in a higher APR. Sometimes it isn’t a huge difference, but it depends on the lender. Just keep in mind that if you agree to repay your loan over 10 years, you can typically expect a lower APR than if you request a 20-year repayment period.

Should you use a cosigner for a private student loan?

If you’re a student, you’re most likely going to need a cosigner for a private student loan, as the vast majority of students are lacking in one or more of the qualification areas I just discussed. For example, many students simply don’t have an established credit history, haven’t started working yet, and don’t have enough income to justify a student loan.

In these situations, a creditworthy cosigner is essentially “lending” you their own qualifications in order to increase your chances of approval and lower your interest rate.

Even if you can qualify for a student loan on your own, it can still be a smart idea to consider using a cosigner unless you have exceptional credit and other qualifications. You might be surprised at the interest rate difference a cosigner can make, so if you have someone who is willing to cosign, it’s certainly worth seeing what impact they have on your loan offers.