A 2023 Guide to Your Student Loan Options
Are you trying to understand federal and private student loan options to finance your higher education? There is a lot of information to unpack as a borrower looking for a student loan. We’d like to highlight two factors as you consider your options: student loan interest rates and student loan repayment plan terms.
Many borrowers place a great deal of emphasis on student loan interest rates when looking at loan options, but may misunderstand how repayment plan terms can impact effective interest rates and the amount repaid over time.
We hope to provide some clarity about student loan interest rates and repayment plans to help you decide on the best student loan option for your education.
Table of Contents
- Understanding Your Student Loan Options
- What Are the Repayment Options for Federal and Private Student Loans?
- What’s the Difference between Federal and Private Student Loan Interest Rates?
- How Can Repayment Plans Impact Student Loan Interest Rates?
Understanding Your Student Loan Options
Before we explore the relationship between student loan interest rates and repayment plan terms, let’s start with a primer about what your student loan options are broadly. As a student loan borrower, you have many options available to you when taking out a federal student loan, and some additional options for private student loans if you have a cosigner. If you don’t have a cosigner and are interested in private student loans, learn more about how to apply for an Edly Student Loan funded by FinWise Bank without a cosigner.
Below are your standard loan options:
Federal Student Loans
A federal student loan is money borrowed from the federal government to help you pay for your education.
What Are the Four Types of Federal Student Loan Programs Available?
The four main types of federal student loan programs available are:
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Direct PLUS Loans
- Direct Consolidation Loans
Below is more information on each loan type:
Direct Subsidized Loans
Direct subsidized loans are available if you are an undergraduate student who can prove financial need. According to Federal Student Aid , the U.S. Department of Education will pay any interest that accrues on direct subsidized loans as long as you are enrolled at least part time.
Direct Unsubsidized Loans
Direct unsubsidized loans are available if you are an undergraduate or graduate student. According to the Financial Aid Office at Berkeley , these loans do not require you to prove financial need but you will be responsible for paying all interest.
Direct PLUS Loans
Direct PLUS loans are available if you are a graduate or professional degree student. You can find this under Grad PLUS loans. There are also options for parents of dependent undergraduate students under the umbrella of the Parent PLUS loans. These loans can be used to help pay for your child’s education.
Direct Consolidation Loans
Direct consolidation loans are a type of federal loan that combines two or more federal loans together in a single loan.
Private Student Loans
A private student loan is offered by a private lender. This can include banks, state agencies, universities, credit unions or other lending institutions.
We won’t go into full detail on how to find the right private student loan lender in this article - there are many options to choose from - but Bankrate does a good job of giving you some top features to look for as you begin your search. Considerations for a private loan include:
- Product details
- Interest rates (we’ll go into more detail below!)
- Fees
- Eligibility requirements
- Repayment terms (also included below)
- Additional features (i.e. autopay, hardship programs, savings opportunities, discharge options, cosigner release, etc.)
What’s the Difference between Federal and Private Student Loan Interest Rates?
After considering your repayment plan options, it’s time to look at federal and private student loan interest rates.
Federal Student Loans Generally Have Lower Interest Rates
Federal student loans typically have lower interest rates than private student loans, but the actual rate with a private lender will depend on a number of factors including the borrower’s (or cosigner’s) FICO credit score and credit history.
Variable vs. Fixed Interest Rate Options
Another key difference between private and federal student loans is variable-rate loans vs. fixed-rate loans.
- A fixed interest rate, or fixed-rate loan, is an agreed-upon interest rate decided upon during the start of your loan.
- A variable interest rate, or variable-rate loan, changes based on the market over time.
While a variable interest rate is obviously more risky if the market is volatile and you end up with higher interest rates, it can be beneficial if you find rates are decreasing and you believe you can pay off your loan fairly quickly before the market goes back up.
Federal student loans are usually offered at a fixed interest rate, while private student loans have the option of fixed or variable-rate loans.
What Are Current Interest Rates for Federal vs. Private Student Loans in 2023?
According to Federal Student Aid, current interest rates for federal student loans in 2023 have been between 4.99 and 7.54 percent, while private student loan interest rates for 2023 have been between 2 and 14 percent.
Below is a more detailed breakdown of each:
2023 Federal Student Loan Interest Rates
- Undergraduate student loans: 4.99%
- Graduate student loans:
- Unsubsidized loans: 6.54%
- Direct PLUS loans: 7.54%
2023 Private Student Loan Interest Rates
Interest rates on private student loans are subject to change, but you can see current rates on Nerdwallet. Because private student loans tend to have more flexible repayment plans and qualifications for their applicants, interest rates can be higher. However, as we’ll talk about in the next section, those repayment plans can have a big impact on what you pay in interest over time.
How Are Interest Rates for Federal and Private Student Loans Determined?
Current student loan interest rates for federal student loans are adjusted each year based on federal law. These rates remain the same for each student who qualifies. Private student loan lenders set their interest rates based on a number of factors, including credit score and history and overall market conditions.
How Do Repayment Plans Impact Student Loan Effective Interest Rates?
Interest rates can be confusing, which is why we wanted to write this article. Whether you are looking for a student loan to finance graduate school, law school, medical school, a STEM program or something else, funding this education can be expensive. A loan’s initial interest rate doesn’t always tell the whole story about how much you could end up repaying. Your effective interest rate can vary widely based on the repayment terms and deferment/forbearance options available. The borrower story below from a Chalkbeat Colorado post details what can happen when the amount borrowed isn’t aligned with the borrower’s income and ability to repay:
"Hernandez had $13,000 in debt for working toward a criminology degree. Without anything to show for her two semesters at the school, she could only find low-paying jobs.
The debt payments ate into her earnings. Some months she needed to choose paying one bill over another. Calls from collectors filled her phonemail. Her credit score tanked.
She still owes $9,000 - a sum that feels unsurmountable."
There are countless stories similar to this about how repayment plans have impacted total loan amounts over time. A low, fixed interest rate for 30 years may not necessarily compare favorably to an income-driven loan you can pay back within 10 years, even if the income-driven loan is at a higher interest rate.
With most student loans, your repayment expectations don’t change if you earn a lower-than-expected post-graduation income or encounter another hardship that impacts your ability to repay. Even if you receive forbearance, your loan term is simply extended and you will pay more interest over time. In contrast, an Edly student loan funded by FinWise Bank has repayment protections in place that place a cap on the number of full payments you’ll have to make, the time you’ll need to repay and the effective interest rate you’ll pay.
Student loans are a great means of financing your education that should help you finish school. As you look for student loans, consider the duration of your degree and how you can finance your education through federal and/or private student loans with interest and repayment plans in mind.
Sources:
Federal Student Aid: What Is a Federal Student Loan?
Consumer Financial Protection Bureau
Bankrate: Types of Private Student Loans
Bankrate: Best Private Student Loan
NerdWallet: Best Private Student Loans
Federal Student Aid: Standard Repayment Plan
Federal Student Aid: Extended Repayment Plan
