Why do student loans have such high interest rates?


Q. I don’t understand why the federal government has such a high interest rate on student loans? They keep you in bondage and in debt because of the high interest rates, but if you choose to go somewhere else to refinance, you lose government protections. Why are the rates so high?
— Miserable

A. Student debt — and the interest that accrues on the accounts — is a challenge for millions of Americans.

The rates you pay will be based on when you got the loan and what kind of loan it is.

The rates for loans through the government’s Direct Loan Program are based on a formula that varies by the borrower and is determined by Congress, said Claudia Mott, a certified financial planner with Epona Financial Solutions in Basking Ridge.

She said each loan category for both subsidized and unsubsidized loans, regardless of type of borrower, have a base rate that uses a 10-year Treasury note as the starting point.

This rate is adjusted annually around a mid-year auction and is 0.7% through June 2022, she said.

“For undergraduates, the add-on is currently 2.05%, bringing the overall total interest rate to 2.75% on both subsidized and unsubsidized loans,” she said. “Graduate students pay more in interest with an add-on of 3.6% for unsubsidized loans and 4.6% for Direct Plus loans.”

As interest rates have fallen over the past few years, the rates for student loans have come down, Mott said. However, older loans may carry higher rates depending on the underlying Treasury bill rate that was in effect for that academic year, she said.

Private lenders each have formulas for calculating loan interest rates which are not made public and will vary by provider, she said.

“However, the rate paid on a private student loan will also take into consideration the applicant’s credit score and may incorporate the repayment time period as well,” she said. “Private lenders will also typically offer both fixed and variable rate loans.”

While it may not be possible to renegotiate the interest rate on a student loan with a private lender, there may be value in looking into a refinance to help lower the rate, she recommended.

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This story was originally published on Oct. 8, 2021. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.