# What is an interest rate & why does it matter for student loans? By [Sasha Bulatskaya](/content/blog/author-page/sasha-bulatskaya/index.html) **|** Published on October 21, 2025 ) When some students take out a loan to pay for college, they get an unpleasant surprise a few years later. They’ll graduate and pay their loan for years, only to watch the balance grow. Why does this happen, and what can you do about it? The short answer is your loan can grow due to higher interest rates. A lower rate could help you save a lot of financial stress later in life. In this blog post, we’ll examine interest rate basics, why they’re important, and how they apply to student debt. ## What is an interest rate? A simple definition. ) At its core, an interest rate is the cost of borrowing money. When you take out a loan, the lender charges you interest as a fee for allowing you to use their money. So, the interest rate is essentially the price you pay for borrowing for all types of loans. ## High interest rates can make it harder to pay off your debts Whenever you borrow money, whether it’s for credit cards, auto loans, student loans, personal loans, or a mortgage, you’ll be charged a percentage of your loan as interest. Each month, you’ll pay money towards your principal loan amount (the original amount you borrowed) and interest. A higher interest rate means less of your money is going toward your principal loan balance, making it harder to pay off the loan in full. A lower interest rate usually means more of your money is going toward the principal balance which makes it easier to pay off your loan faster. However, your final payoff timeline depends on your monthly payment and loan term. ## How do I get a lower interest rate on my student loans? Most people who get [low interest rates](/content/blog/how-to-lower-student-loan-interest-rates/index.html) have a high credit score. They’ve proven that they can pay their bills on time and financial institutions are more likely to trust that they will pay back the loan. At its core, low interest is a reflection of the borrower’s financial habits and a good credit history. ## Why do students see high interest rates on their loans? Most undergraduate students who apply for an independent private student loan don’t have a long credit history, which causes them to have a low credit score. They haven’t shown that they can pay off their bills on time (yet), and tend to see higher rates on their loans. But, [working with a cosigner](/content/blog/do-you-need-a-cosigner-for-student-loans/index.html) can help you unlock a lower interest rate. ## Is APR the same as an interest rate? You may have come across the term APR (Annual Percentage Rate) when exploring loans or credit card offers. While the interest rate and APR might seem similar, they serve [different purposes](/content/blog/apr-vs-interest-rate-2/index.html). The interest rate is a percentage of the principal loan amount you borrow. On the other hand, the [APR encompasses](https://www.investopedia.com/terms/a/apr.asp) not only the interest but also any additional fees and charges associated with the loan. ### Variable interest rates vs. Fixed interest rates ) When it comes to student loans, you’ll encounter two main types of interest rates: variable and fixed. [Which is better for student loans](/content/blog/student-loan-variable-or-fixed/index.html)? Fixed interest rates remain constant throughout the life of the loan. This means your monthly payments won’t change. Fixed rates are a popular choice for those who value consistency and want to plan their budget accordingly. Variable interest rates can change over time, often tied to market conditions such as the [Federal Reserve](https://www.federalreserve.gov/aboutthefed.htm) (Fed) rate hikes. If market conditions worsen, the interest rate on your loan could rise, making your monthly payments higher. Variable rates might appeal to borrowers who are confident in their ability to handle and adapt to potential interest rate fluctuations. ## What does this mean for my student loans? When you take out a student loan pay close attention to the amount of interest you’re expected to pay. Here’s a breakdown of how interest rates can impact your loans: ### Higher rates are not good for student loan borrowers Higher interest rates in the economy usually mean higher interest rates for student loan borrowers too, but that’s not always the case. The Fed isn’t directly responsible for setting student loan rates, but what’s happening in the financial markets (including rate increases by the Fed) can impact the amount of money you’ll pay in interest. #### Interest on federal student loans All [federal student loans](https://studentaid.gov/understand-aid/types/loans) have a [fixed interest rate](https://studentaid.gov/understand-aid/types/loans/interest-rates), so they’re not subject to interest rate fluctuations. If the Fed raises rates, any new loans you borrow will likely come with a higher rate. #### Interest on private student loans Private student loans can have both variable and fixed interest rates. At [Earnest](/content/student-loans/index.html), you can choose your own rate and adjust your payment timeline to get the rate, payment, and term balance you need based on your loan eligibility and credit qualification. #### Paying off your student loans Don’t make the mistake of only making interest payments on your student loans. In the short term, you might save on monthly payments, but your loan balance won’t go down due to accrued interest. ## How to save on interest rates for student loans At Earnest, we let you choose your interest rates for student loans, but not every lender will do that. Here’s how you could save on interest: #### Check an interest rate calculator before signing a loan When you get an interest rate quote from a lender, make sure they show you what your final loan amount will look like when you’re done paying it off. Check your monthly payment and how much interest you’ll pay over the life of the loan. You can use the [Earnest calculator](/content/student-loans/student-loan-calculator/index.html) below to see what your repayment could look like. ) ## Sign up for automatic payment discounts with Auto Pay When you enroll in Auto Pay, your monthly payments are automatically deducted from your bank account. Not only does this save you from the risk of forgetting a payment deadline, but it also comes with a financial perk. Some lenders, like Earnest, provide a 0.25% discount on your interest rate when you sign up for [Auto Pay](https://help.earnest.com/hc/en-us/articles/218735958-How-do-I-enroll-in-monthly-Auto-Pay-Student-Loan-Refinancing). ### Work with a cosigner to get a lower rate Asking someone you trust to cosign your student loan could help you secure a lower rate. Different lenders have different rules around who can be a cosigner. At Earnest, it could be anyone who is willing to help you pay for your education, including a parent, spouse, or legal guardian. **Find ways to save on rates** Being informed about how interest rates function and change can empower you to make sound financial decisions. Whether you’re in the midst of your studies or already managing your student loan repayment, a solid grasp of interest rates can help you borrow money at a cheaper rate. ) ## About the Author ### Sasha Bulatskaya Sasha is the Senior Manager of Brand and Content at Earnest. She has been writing for ten years and has been focused on educational finance and financial aid for over three. Her passion for mission-driven companies brought her to Earnest in 2020, and she's been helping make student finance more accessible ever since. She strives to demystify personal finance and student loans to help borrowers make the best decisions for their financial situation.