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The Ultimate Guide to Student Loan Interest Rates

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One in eight Americans has student loan debt. Together, they owe a staggering $1.75 trillion! How is it even possible to rack up that much student loan debt? Well, there are a lot of factors that contribute to that number. One of those factors is the rising student loan interest rates.

Before you take out a student loan, it’s important you know what the loan entails. The loan amount isn’t all you’ll have to pay back. There’s a little thing called interest that can quickly increase how much you must repay to your lender. Understanding your student loan interest rate can help you determine just how much you’ll have to pay back.

What is interest?

Don’t feel bad if you don’t understand the basics of interest. Interest is the cost a lender decides to charge you for borrowing money. Interest is generally calculated as a percentage of the unpaid principal amount of the money borrowed. Unlike other forms of debt, like credit cards and mortgages, Direct Loans accrue interest daily. Ultimately, the longer you hold your student loans, the more they will cost.

Student loans begin accruing interest as soon as you receive your loan and will continue to accrue interest while you’re in school. If you have a subsidized loan, the U.S. Department of Education pays the interest while you’re in school at least half-time, during your grace period, and during periods of deferment. In contrast, if you have an unsubsidized loan, your interest will accrue and be capitalized while you’re in school, during your grace period, and during periods of deferment or forbearance. In other words, this interest will accumulate and be added to the principal amount of your loan, which will increase the overall cost of the loan.

When you begin making payments, your servicer will automatically apply payments to any outstanding fees and interest before applying any money towards the loan principal amount.

How do I calculate interest?

You can use the following steps to calculate your student loan interest. For this example, we’ll say you borrowed $10,000 at a 5.05 percent fixed interest rate. On a 10-year standard repayment plan, you’d have to pay about $106 for your monthly payment.

  1. Determine your interest rate factor. To figure out your daily interest rate, divide your student loan interest rate by the number of days in the year.

    .0505/365 = 0.00014, so your interest rate factor would be 0.014 percent.
  2. Calculate the interest your loan will accrue per day. Multiply your outstanding principal balance by your daily interest rate.

    $10,000 x 0.00014 = $1.40, so your loan will accrue $1.40 in interest every day.
  3. Discover your monthly interest payment. Multiply the interest your loan will accrue per day by the number of days since your last payment.$1.40 x 30 = $42, so your loan will accrue $42 in interest every month.

What are federal student loan interest rates?

Federal student loan interest rates vary depending on the type of loan and the first disbursement date of the loan (i.e., the date it was paid out to you). The only federal loans that do not vary depending on the disbursement date are Perkins Loans, which have a fixed interest rate of 5 percent regardless of the first disbursement date.

Here are the fixed interest rates for Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans first disbursed on or after July 1, 2022, and before July 1, 2023:

Type of Loan Type of Borrower Fixed Interest Rate
Direct Subsidized Loans and Direct Unsubsidized Loans Undergraduate 4.99%
Direct Unsubsidized Loans Graduate or Professional 6.54%
Direct PLUS Loans Parents and Graduate or Professional Students 7.54%

Federal law sets these interest rates. So, they are fixed rates that will not change over the lifetime of the loan. Click here to view federal student loan interest rates on loans first disbursed before July 1, 2018.

What are private student loan interest rates?

Private student loan interest rates vary depending on the lender and the credit history of the borrower and cosigner, if applicable. The average private student loan interest rate is generally higher than a federal student loan, but it can range from 3 to nearly 14 percent.

What’s important to note about private student loan interest rates is that they tend to be variable rates. This means that they may fluctuate over time, according to the market. So if market rates are low, then your interest rate will stay low. But when market rates rise, your interest rate will rocket upwards too. Ultimately, this means your monthly student loan payments may change from month to month, according to your variable interest rate.

Because of these variable rates and the other benefits that federal student loans offer, you should generally borrow as much in federal loans as possible before turning to private student loans.

If you’ve fallen into an interest trap with your student loans, give us a call and explore your repayment options!

Disclaimer: The viewpoints and information expressed are that of the author(s) and do not necessarily reflect the opinions, viewpoints, and official policies of any financial institution and/or government agency. All situations are unique and additional information can be obtained by contacting your loan servicer or a student loan professional.