Understanding student loan interest rates can be a complex business. Some student loans are have fixed interest rates (that means the rate stays the same over the life of your loan), while others have variable rates (that means the rate varies as interest rates increase or decrease).
Some are tied to the 10 year Treasury note, whereas others are tied to the prime interest rate. Currently, student loans interest rates are relatively low given that borrowing costs have been kept relatively low over the last few years. The Federal Reserve, for example, has been purchasing Treasury notes in an attempt to keep interest rates low and stimulate the economy. As student loan interest rates rise, this will make it more difficult for borrowers to repay their loans.
Generally, fixed interest loans are best when interest rates are low and you want to lock in a low rate over the course of your loan. In contrast, variable interest loans are best when interest is high and you want lower rates over the course of your loan. If you do have a student loan with high fixed interest rates, it is possible to refinance those loans at a lower rate later on.
2014-2015 Student Loan Interest Rates
The Current Rate: 4.66% (up from 3.86% last year) for undergraduates and 6.21% for graduate and professional students.
The Current Rate: Perkins loan are fixed at a 5% interest rate and don’t vary from year to year.
Parent Plus Loan
The Current Rate: 7.21% (up from 6.41% last year).
Plus Loans for Graduate Student
The Current Rate: 7.21% (up from 6.41% last year)
Private Student Loans
The Current Rates: Depending on the lender, average private student loan interest rates are around 5%-7% but the interest rate you get offered depends on your credit score or that of your co-signer. Private student loans typically have variable interest rates from 3%-12% and require a co-signer, but there are some available without one.
Student Loan Interest Caps:
Federal student loan rates are calculated according to the 10 year Treasury rate. For Stafford Loans 2.05% is added to the 10 year Treasury rate, for graduate Staffords that number is 3.6% and for Plus loans it’s 4.6%. However, recently Congress capped the rates to 8.25% for undergraduate Stafford loans, 9.5% for Stafford graduate loans, and 10.5% for all Plus loans.