You’ve probably heard that interest rates, the percentage that lenders can charge for borrowing money, are rising after years of low levels. Why? Inflation is growing, which makes things cost more. To slow this inflation and strengthen the economy, the U.S. central bank, the Federal Reserve (the “Fed”), has been increasing its interest rate, which causes other lenders to raise their rates, too.footnote 1
Every time the Fed raises interest rates, it can impact all types of loans, including student loans.
First, a few words about student loan interest rates
Basically, an interest rate is the percentage you agree to pay a lender to borrow their money, whether it’s for a federal or private student loan. It’s calculated on the unpaid principal. That’s the amount you borrowed plus any unpaid interest that’s been capitalized (added to your loan’s total principal amount). Student loan interest accrues (grows) every day.
Federal student loans have a fixed interest rate; private student loans generally offer you a choice of a fixed or variable rate.
- A fixed interest rate stays the same for the life of your loan—the rate you get when you receive the loan is the same one you’ll have when you pay it off.
- A variable rate is calculated based on an index (set by the banking industry) and a margin (set by the lender). The index typically mirrors federal interest rate movements…and when the index goes up or down, a variable rate will likely do the same.
Note: The two most common indexes used to determine private student loan interest rates are the Secured Overnight Financing Rate (SOFR) and the London Interbank Offered Rate (LIBOR). You may see them mentioned in your loan documents.
Why is my student loan interest rate increasing?
As interest rates rise for all loans, student loan rates typically go up, too.
- Federal student loans have fixed interest rates, so the rate you have now will stay the same for the life of the loan. If you need a new federal loan, though, you may end up with a higher interest rate. A federal direct loan taken out before July 2023 had a rate of 4.99%, while the interest rate on loans taken out between July 1, 2023 and July 1, 2024 will be 5.50%.footnote 2
- Private student loans offer the choice of fixed or variable interest rates, which you choose when you first get the loan.
- Existing fixed interest rates on loans won’t change, but new loans will likely have a higher rate.
- If you have a variable interest rate loan, your interest rate has probably been pretty stable. As rates increase, however, indexes will likely rise, causing your loan rate and total cost to go up, too.
What can I do about my rising variable rate loan?
At Sallie Mae, variable rates are set around the 25th of every month. Log in to your account and check your monthly billing statements to see if there’s an increase in your monthly payment. If there is, you’ll see messaging indicating that “the interest rate changed.”
You can’t change the type of interest rate (fixed or variable) that your private student loan has once it’s certified (approved) by your school. But there are some things you can do to lower your total loan cost.
- Take advantage of discounts your lender offers, like Sallie Mae’s discount for enrolling in auto debit.
- Make extra payments toward your principal (the amount you borrowed) whenever you can. Every little bit helps! The less principal you have, the less you’ll have to pay for your loan. Check with your lender to see how to make sure these extra payments go toward your loan’s principal.
When we’re in an environment of rising interest rates, any kind of loan—car, house, and education—can be more expensive to get and pay off. While you can’t change an existing student loan, you should keep an eye on your monthly statements and take steps to make extra payments whenever you can to lower your loan cost.