College  |  March 20, 2023  |  Chris Morrison

Understanding federal loan interest rates

What you'll learn
  • What a federal student loan is
  • What current federal interest rates are
  • The differences between a federal and private student loan
  • How you can get a federal loan

Federal student loans continue to be the most common form of student borrowing. Offered by the U.S. government with interest rates set by federal law, and with a variety of repayment options, federal student loans can be a competitive way to pay for college.

That said, it’s important to understand how they work to find out if they are the right option for you.

What is interest?

Interest is the cost of borrowing money from a lender; an interest rate is the percentage charged to borrow that money. It’s calculated as a percentage of the unpaid principal (i.e., the remaining balance) of the loan. That’s why it’s important to understand how much you’ll be charged for interest.

Money borrowed through federal student loans will ultimately need to be paid back with interest—unless you’re borrowing Direct Subsidized Federal Loans, which have such benefits like the government paying interest on the loan while you’re in school. These loans are needs-based and aren’t available to everyone.

What are the interest rates for federal student loans?

Federal student loan interest rates are reviewed and determined based on 10-year Treasury notes, plus a fixed rate of interest. They’re reset on July 1 of every year. Rates are set by federal law (not the Department of Education). Federal student loans only offer fixed interest rates, which means your rate never varies and you’ll have a predictable monthly payment.

Here are the current interest rates for federal student loans first disbursed on or after July 2022, and before July 1, 2023:

- Direct Subsidized Loans (Undergraduate): These loans currently have a fixed interest rate of 4.99% and are only offered to those undergraduate students who’ve demonstrated financial need as defined by federal law. The government pays interest on the loan while the undergraduate student is in school at least half-time, during deferment (a period when loan payments are temporarily postponed), or during the grace period (typically the first six months after leaving school).

- Direct Unsubsidized Loans (Undergraduate): These loans share the same fixed interest rate as Direct Subsidized Loans, 4.99%, but are not based on financial need. The government does not pay the interest on Direct Unsubsidized Loans, so you’re responsible for all of it.

- Direct Unsubsidized Loans (Graduate/Professional): These loans are available for graduate or professional students at a current fixed interest rate of 6.54%. Similar to their undergraduate counterpart, the government does not cover the interest on Direct Unsubsidized Loans.

- Direct PLUS Loans: These loans are unsubsidized, credit-based federal loans for parents of dependent students—or graduate/professional students—and have a current interest rate of 7.54%. Interest for these loans is charged throughout all periods of the loan.

Federal student loans vs private student loans

Just as the government offers federal student loans, banks and credit unions offer private student loans. These also charge interest (which you’ll have to pay back).

Unlike federal loans, which only offer fixed interest rates, most private student loans offer a choice of fixed or variable rates. Another difference is that private student loans generally require a credit check. That means the lender will review your credit history to make sure you can pay back the loan. If you haven’t had time to establish credit (most college students haven’t), you may need to add a cosigner—someone with good credit who will be responsible along with you for the loan. 

Generally, federal student loans have more flexible repayment plans available, so consider using those before you turn to a private student loan.

How do you get federal student loans?

The way to get grants, work-study, or federal loans is to submit the Free Application for Federal Student Aid (FAFSA®) every year. Each school you’re accepted to will send you a financial aid offer, which outlines the details of the amount of aid you’re entitled to. Federal student loans will be included in the offer—but it’s important to realize that, unlike grants and work-study, you’ll need to pay back federal loans with interest.

If you need money for college after you’ve exhausted savings, scholarships, and grants, federal student loans can be an excellent option. Make sure you understand the terms of your loans, the amount of interest you’ll be paying, and keep on top of changes to federal loan programs.

footnote Sallie Mae does not provide, and these materials are not meant to convey, financial, tax, or legal advice. Consult your own financial advisor, tax advisor, or attorney about your specific circumstances.

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