What is the Average Federal Student Loan Interest Rate?

Jocelyn Segoviano
Jocelyn Segoviano

Jocelyn Segoviano is a freelance writer specializing in personal finance topics. With a passion for helping individuals navigate their financial journeys, she has been providing insightful advice and practical tips to readers for over years.

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Daniel Kahn
Daniel Kahn
Daniel is the co-founder and COO at Sparrow. Daniel is responsible for the day-to-day operations of a company, working closely with other members of the executive team to develop and implement strategies to support the growth and success of the company.
Daniel was a 2023 Forbes 30 Under 30 lister in the Education category.  Daniel was born and raised in Raleigh, North Carolina and graduated from Duke University in 2020.
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Camden Ford
Camden Ford

Camden leads Sparrow’s business operations – everything from product management to business analytics. After graduating Cum Laude from Duke University where he studied Civil Engineering, Camden worked as a Consultant for A.T. Kearney where he worked in their Strategic Operations practice. With a strong background in analytics, Camden strives to deliver data-driven conclusions and insights.

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November 10, 2023

A key factor to deciding whether to get a federal student loan or not is looking at the interest rate. Your federal student loan interest rate will add to how much you pay over the life of the loan. But what is student loan interest? And how is your interest rate determined? 

Here’s everything you need to know about your federal student loan interest rate. 

What is Student Loan Interest? 

Student loan interest is the cost of borrowing the loan and the way lenders profit off of lending you money. Interest rates are calculated as a percentage of your loan. So, if you have a 5% interest rate on a $100 loan, your interest is $5. Because interest accumulates on your loan, it raises the overall price of the loan. Additionally, the longer your repayment period, the more interest builds up, and the more you’ll pay. 

How Are Federal Student Loan Interest Rates Determined? 

Unlike private student loan interest rates, which are set by factors like your credit score, federal student loan interest rates are set by federal law. To calculate the interest rate, they’ll take the 10-year Treasury note yield and add a fixed increase. A 10-year Treasury note is a loan you lend out to the government. The yield is the amount of interest the government owes you expressed as a percentage. The 10-year Treasury Note is often used as a benchmark for other loan interest rates. 

Each type of federal loan will have its own interest rates. The interest rates for the year are decided in the spring and come into effect July 1st of that year. The rates will remain the same until June 30th of the following year.

(If this sounds confusing, don’t worry. All you need to know here is that federal student loan interest rates are set by federal law each year.)

All federal student loan interest rates are fixed and include rate caps. A rate cap is the maximum interest rate that they can charge you. 

The following are the formulas for federal student loan interest rate: 

  1. Direct Unsubsidized Loans for Undergraduates – 10-year Treasury Note Yield + 2.05%, capped at 8.25% 
  2. Direct Unsubsidized Loans for Graduate Students – 10-year Treasury Note Yield + 3.60%, capped at 9.50% 
  3. Direct PLUS Loans – 10-year Treasury Note Yield + 4.60%, capped at 10.50% 

Current Federal Student Loan Interest Rates 

Due to the COVID-19 pandemic , the U.S. Department of Education has implemented a COVID-19 emergency relief program for federal student loans. The program offers 0% interest rate on your federal student loans until December 31, 2022. 

The current federal student loan interest rates for the 2022-2023 school year are: 

  1. Direct Subsidized Loans and Direct Unsubsidized Loans for Undergraduates – 4.99% 
  2. Direct Unsubsidized Loans for Graduate or Professional Students – 6.54% 
  3. Direct PLUS Loans – 7.54%

These federal interest rates only apply for loans taken out on or after July 1, 2022 and before July 1, 2023. If you took out a loan before or after this time frame, you will have a different interest rate. 

Current Federal Student Loan Fees

In addition to paying interest on your federal student loan(s), you will also encounter fees. You won’t normally be charged extra for those fees. Instead, the fees will be taken out from the amount disbursed for federal student loan(s). Because of the fees, you will receive less money than you officially borrow. However, you are responsible for paying back the whole loan, not just the amount you received. 

The current fees are applicable to federal loans disbursed on or after October 1, 2020 and before October 1, 2023. For Direct Subsidized and Unsubsidized Loans, the fee is 1.057%. For Direct PLUS Loans, the fee is 4.228%. 

So, for example, if you borrowed $1,000 in a Direct Subsidized Loan, $10.57 would be charged in fees, and the remaining balance of $989.43 would be disbursed to your school. However, you would still be responsible for paying back the full $1,000.

Final Thoughts from the Nest 

Knowing interest rates before you take out a loan is important to figuring out the overall cost. The great thing about federal student loan interest rates is they’re fixed and capped, so you won’t be charged too much to borrow. 

While federal student loans are great, private student loans can be a big help, too. Some private student loan rates may be lower than federal loans. To get a jump start on your search for private loans, use the Sparrow application. Filling out this one application will match you with what you are qualified for from 15+ private lenders.

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