Federal Student Loan Interest Rate History
Paying for college most often requires a mixed package of financial aid. “Free money” includes scholarships (school and/or private) and grants (school, federal, and/or state). The majority of college students will borrow federal loans in order to turn their college dreams into a reality. According to The College Board, in the 2013-14 academic year, the average undergraduate borrowed approximately $6,670 in Direct Loans (the main federal loan program).
Student borrowers will need to understand basic loan terms such as:
- Interest rate: The amount assessed to a principal loan amount that is either fixed or variable over the life of the loan
- Principal amount: The absolute dollar amount borrowed (which can increase or decrease over time, known as principal balance
- Capitalizing interest: Interest that is added to the principal amount of a loan
- Compounding interest: As interest accrues to a principal amount due, a borrower ends up paying interest on that interest
When reviewing historical federal student loan interest rates, it is important to note that prior to June 30, 2010, federal lending occurred along two tracks – the Direct Loan Program (still exists) and the Federal Family Education Loan Program (which was phased out on July 1, 2010 by the Health Care and Education Reconciliation Act of 2010). As a benchmark, according to Federal Student Aid, for the 2015-16 academic year, the following interest rates apply to Federal Direct Loan Program Loans:
- 4.29 percent: Direct Federal Subsidized Loan (for undergraduates)
- 4.29 percent: Direct Federal Unsubsidized Loan (for undergraduates)
- 6.84 percent: Direct Federal PLUS Loan (for parents of dependent undergraduates)
- 5 percent: Federal Perkins Loan
Setting interest rates is a bipartisan political phenomenon and not a matter solely of education policy. The political life of interest rates accounts for their historical variability. For instance, as Federal Student Aid reports, for the academic years specified (running from July 1st through June 30th), Federal Direct Subsidized Loan rates were as follows for undergraduate borrowers:
- 6.8 percent: 2006-08
- 6.0 percent: 2008-09
- 5.6 percent: 2009-10
- 4.5 percent: 2010-11
- 3.4 percent: 2011-13
Federal Direct Unsubsidized Loans did not experience as much fluctuation. From July 1, 2006 through June 30, 2013, the rate remained constant at 6.8 percent. Similarly, in that same period, the interest rate for Federal Direct PLUS Loans (for parents) was 7.9 percent.
Interest rates are a main term of student loan contracts, and generally cannot be changed by the borrower. However, a discount is sometimes available. For instance, according to Federal Loan Servicing, when federal student loan borrowers sign up for free for Direct Debit, they qualify for a 0.25 percent interest rate reduction. Private lenders may offer this same deal. Student borrowers with private loans are best advised to contact their lender for information on any discounts that may be available as a reward for a history of timely payments.
Although federal student loan borrowers have no control over the interest rates of loans, the Federal Direct Loan program offers different repayment options, some of which are sensitive to income. As Federal Student Aid notes, borrowers can contact their loan service provider to explore repayment plan options. The U.S. Department of Education has developed a Repayment Estimator to help students calculate how much they should expect to repay on a student loan.