The interest rates for federal student loans from the U.S. Department of Education are set by Congress through legislation. The interest rates are closely tied to the financial markets, and are usually similar to the rate of the 10-year Treasury note plus an additional amount. A borrower’s student loan servicer has no authority over the rate of the loan and cannot change it over the loan’s lifetime. Further, the interest a borrower pays on the loan is deposited into the U.S. Treasury. Most federal student loans have fixed rates for the lifetime of the loan, though some variable-rate loans do exist. With these loans, the interest rate is typically adjusted annually.
Private student loan lenders, such as Sallie Mae, Wells Fargo or Discover, are allowed to set their own interest rates. The amount they charge is based off of the federal student loan rates, the credit history of the borrower and the credit history of the loan’s co-signer.
Federal Student Loan Rates
The magnitude of the federal student loan interest rate varies depending on who is borrowing the money. Undergraduate students are charged the least, and graduate and professional students are charged more. The loans with the highest rates are charged to parents taking out PLUS loans for their children, regardless of whether the child is an undergraduate or graduate student. For example, in 2017, the rate for undergraduate loans is 3.76% and the rate for graduate loans is 5.31%. Parents taking out a PLUS loan face an interest rate of 6.31%.