Federal student loans have fixed interest rates set by Congress; private loans vary by lender and your credit
The interest rate on your student loan depends on whether it is federal or private. Federal loans have a single fixed rate for all borrowers in the same loan year — Congress sets these rates, and they do not change over the life of the loan. Private loans are issued by banks and credit companies, and rates vary based on your credit score, income, and the lender's own pricing.
Federal rates are lower on average than private rates, but federal loans come with income-based repayment options and forgiveness programs that private loans do not. If you have both types, you will manage two separate interest calculations and payment schedules.
Key Takeaways
- Federal undergraduate loans issued in the 2024–2025 school year carry a 6.53% fixed interest rate; graduate loans are 8.05%; PLUS loans are 9.05%.
- Private loan rates range from roughly 3% to 14% depending on your credit score and the lender, and may be fixed or variable.
- Federal loans accrue interest while you are in school (except subsidized loans); private loans vary by lender policy.
- Interest on federal loans is calculated daily and added to your balance monthly; the exact amount depends on your outstanding principal and the number of days in the billing period.
Federal loan interest rates by loan type
The federal government issues four main types of student loans, each with its own interest rate. Rates are set annually by Congress and locked in for the life of the loan.
Subsidized Direct Loans (for undergraduate students with demonstrated financial need) and Unsubsidized Direct Loans (for undergraduates, graduates, and professional students) both carried 6.53% interest for loans disbursed between July 1, 2024, and June 30, 2025. Direct PLUS Loans (for graduate students and parents of undergraduates) were 9.05% for the same period. Direct Consolidation Loans use a weighted average of the rates on the loans being consolidated, rounded up to the nearest one-eighth of a percent.
These rates change each year. The Department of Education publishes the new rates in May for loans disbursed starting July 1. If you took out a loan in 2023, it keeps that year's rate forever, even if rates rise or fall in later years.
How federal interest accrues and is added to your balance
Federal loan interest is calculated daily. The formula is: (Outstanding Principal × Interest Rate) ÷ 365 = Daily Interest. This amount is added to your account each day you owe money.
Interest is typically capitalized — added to your principal balance — at specific points: when you leave school, when your grace period ends, or when you move from one repayment plan to another. Once interest is capitalized, you begin paying interest on the interest. On a subsidized loan, interest does not accrue while you are enrolled at least half-time in school, but it does accrue on unsubsidized loans from the moment they are disbursed.
Your monthly payment is calculated based on your repayment plan. On a standard 10-year plan, you pay a fixed amount each month. On income-driven plans, your payment is based on your discretionary income, and any interest not covered by your payment is added to the principal each month — this is called negative amortization.
Private student loan interest rates and how they are set
Private lenders set their own rates based on your creditworthiness. Most private loans fall between 3% and 14%, though rates outside this range are possible. Your rate depends on your credit score, debt-to-income ratio, income history, and whether you have a cosigner.
Private loans may be fixed-rate or variable-rate. A fixed-rate loan keeps the same interest rate for the entire repayment period. A variable-rate loan starts with a lower introductory rate tied to a market index (such as the prime rate or LIBOR), and the rate adjusts periodically — usually quarterly or annually — based on that index. Variable rates can save you money early but expose you to higher payments later if rates rise.
Private lenders also differ on when interest accrues. Some charge interest while you are in school; others defer interest until after graduation. Some allow interest-only payments during school; others require full monthly payments immediately. Read your promissory note carefully to understand your lender's specific terms.
Comparing federal and private loan costs over time
A federal loan at 6.53% will cost less in total interest than a private loan at 8% or higher, all else equal. But the comparison is more complex when you factor in repayment flexibility. Federal loans offer income-driven repayment plans that can lower your monthly payment if your income is low; private loans typically do not. Federal loans also offer forgiveness programs — Public Service Loan Forgiveness, for example, erases remaining balance after 120 may have access to payments if you work in certain sectors.
If you have both federal and private loans, prioritize paying down the private loans first, since they lack the safety nets of federal loans. If your income drops, you can adjust your federal payment; you cannot with private loans. If you face hardship, federal loans offer deferment and forbearance; private loans may not.
| Loan Type | Interest Rate (2024–2025) | Fixed or Variable | Accrues During School |
|---|---|---|---|
| Subsidized Direct Loan | 6.53% | Fixed | No |
| Unsubsidized Direct Loan | 6.53% | Fixed | Yes |
| Direct PLUS Loan | 9.05% | Fixed | Yes |
| Private Loan (typical range) | 3%–14% | Fixed or Variable | Varies by lender |
What happens to interest if you enter income-driven repayment
If your monthly payment under an income-driven plan does not cover all the interest that accrued that month, the unpaid interest is capitalized — added to your principal. This means your balance grows even though you are making payments. Over time, this can significantly increase the total amount you repay.
Federal loans in income-driven plans may may have access to for interest subsidy programs. Under certain conditions — for example, if you are a teacher or work in public service — the government may pay down accrued unpaid interest. Check the terms of your specific plan and your employment sector to see if you may have access to.
Frequently Asked Questions
Can I get a lower interest rate on my federal student loan?
No. Federal loan rates are set by Congress and are the same for all borrowers in the same loan year. You cannot negotiate or refinance a federal loan to a lower rate with the federal government. You can refinance into a private loan with a lower rate if your credit has improved, but you will lose federal protections like income-driven repayment and forgiveness programs.
What is the difference between fixed and variable interest rates?
A fixed rate stays the same for the entire life of the loan. A variable rate starts lower but adjusts periodically based on market conditions, so your rate and payment can increase. Variable rates are riskier if interest rates rise sharply, but they can save money if rates stay flat or fall. Most federal loans are fixed; private loans may be either.
Does interest accrue on my loan while I am in school?
On subsidized federal loans, no — the government pays the interest while you are enrolled at least half-time. On unsubsidized federal loans and PLUS loans, yes — interest accrues from the moment the loan is disbursed. On private loans, it depends on the lender; check your promissory note.
What happens if my income-driven payment does not cover the interest?
The unpaid interest is capitalized — added to your principal balance. You then owe interest on that interest in future months. This can cause your balance to grow even while you are making payments. Some federal loan programs offer interest subsidy options if you work in public service or teaching.
Should I pay off high-interest private loans before federal loans?
Generally yes. Private loans lack the income-based repayment options and forgiveness programs of federal loans. If your income drops, you can lower your federal payment; you cannot with private loans. Paying private loans first protects you if your financial situation changes.