Why Are Student Loan Rates So High?

Education is a treasured asset, and the costs of college education in the US are just getting higher. Hence, many parents and students are bound to seek a student loan to meet the challenges of paying for a degree. 

The rates are, unfortunately, much higher when compared to other financing types, like mortgages and personal loans. 

Even though federal loan rates recently dropped due to the ongoing COVID-19 pandemic after two years of continuous increases, rates are still at 4.53%.

Although still high, when compared to previous rates of 5.05% for the 2018-2019 school year and 6.80% in 2017, rates have certainly moderated substantially. Compared to federal loan rates, the interest rate for private loans can be even higher.

The primary reason for high interest rates on loans is because they’re what’s considered unsecured financing.

The loans aren’t secured by any asset to guarantee repayment or partial coverage of a defaulted loan. 

When you fail to pay a car loan or mortgage, the lender is permitted to seize and sell your asset. 

However, this isn’t possible for student loans which are guaranteed personally.

Hence, lenders charge a higher rate of interest to compensate for the risk. 

How Student Loan Rates Work

Terms differ based on whether it’s a federal or private loan that’s issued to a borrower. 

In the case of federal loans, every borrower seeking a federal loan for the same year is required to pay the same interest rate.

For private loans, the primary driver for the interest rate is the borrower’s credit score. 

For Federal Student Loans: 

• Every year the interest rate is set by Congress on the basis of a 10-year Treasury note’s yield 
• Many of them charge certain fees in the form of a percentage of the total loan amount 
• The rate of interest remains fixed for the entire loan term

For Private Student Loans: 

• Interest rates are entirely based on credit scores and market conditions 
• Some private lenders avoid charging origination fees 
• Borrowers are allowed to select between variable and fixed interest rates 
• Variable rates can change quarterly or even every month. 

What Are Considered Good Rates?

When applying for a student loan, there’s a lot to be considered, including the principal amount the lender would help you with, the overall term of the loan, and any possible penalties or fees. Still, the most significant is the interest rate. 

Private student loan rates can either be higher or lower compared to federal loans.

However, it basically depends on the credit score as well as the year you’re applying for the loan.

Moreover, the best student loan interest rates are reserved for borrowers with the best credit scores. 

The best rate of interest for various types of student loans are as below:

1. For Federal Students Loans (fixed) 

2. For Private Student Loans

3. For Refinanced Student Loans

How To Get The Best Rates?

Here are some of the common ways of obtaining the best rate of interest for your student loans:

• Don’t stick to the first lender offering you a loan. Compare the rates for current federal loans with interest offered by various private loans 
• In case you have a bad credit score or no credit history, make sure you have a cosigner while applying to qualify for the student loan with a better interest rate 
• Consider the origination fees while calculating the amount to be borrowed 
• Federal loans don’t include origination fees and they’re deducted from a loan disbursement, giving you an actual federal loan cost with an increased or decreased rate of interest
• Weigh up federal loans even if you’re provided with better rates from private lenders due to the extra protections afforded like deferment, forbearance, and even forgiveness in certain cases

Bottom Line

Student loan refinancing is among the best ways of reducing the rate of interest on loans.

Even reducing a few fractions of a percent from your interest would help save an immense amount over the life of a long-term loan.

When hunting for a  loan, be sure to compare every aspect and benefit while checking quotes from multiple lenders to uncover the best available rates.