Understanding student loan interest rates

rising interest rates on student loans

When you are ready to borrow money in order to pay for college, you quickly learn that student loan interest rates are part of the deal.  This means that you will be forced to pay more than the amount you originally borrowed. Why? Because both federal and private lenders charge interest.

Who is the ‘lender’?

The organization offering the loan is the lender. This could be a credit union, bank, the borrower’s school, another private institution, or the U.S. Department of Education. The lender sets the interest rates.

What is ‘interest’?

A lender charges interest as a cost for borrowing money. The interest rate is calculated as a percentage of the original amount and the interest can accrue daily. You may or may not be responsible for paying all of the accumulated interest based on whether or not your loans are subsidized or unsubsidized

It’s important to compare interest rates when you are shopping for a student loan. Since interest rates go hand-in-hand with acquiring student loans, this is what you need to know:

Federal Student Loan Interest Rates

This interest rate is set by the government and standardized. Everyone who is eligible for federal student loans receives the same interest rate. However, they may change from year to year. Due to fluctuating interest rates over the years, it’s important to know the interest rate attached to a student loan before borrowing.

Interest rates for Direct Loans First Disbursed on or after July 1, 2019, and before July 1, 2020:

  • Direct Subsidized and Direct Unsubsidized Loans (undergraduate): 4.53%
  • Direct Unsubsidized Loans (graduate or professional): 6.08%
  • Direct PLUS Loans (parents and graduate or professional students): 7.08%

A simple daily interest formula is used to calculate the accruing interest:

Interest amount = (Outstanding Principal Balance x Interest Rate Factor) x Number of Days Since Last Payment

The ‘interest rate factor’ calculates the amount of accumulating interest. To determine it, divide your loan’s interest rate by the number of days in the year.  

Keep in mind that there are ways to save on interest such as consolidating. Consolidating would allow you to combine multiple federal education loans into one single loan. Therefore, you would pay one monthly payment rather than multiple. This may also grant you access to student forgiveness programs and additional loan repayment plans.

Private Student Loan Interest Rates

Since lenders decide on how much interest to charge borrowers, there is much more variation where private student loan interest rates are concerned. Each service lender also sets their own terms and eligibility requirements, which may include a cosigner. 

In order to find the best student loan rates, it’s important to shop around. College Life Today offers a list of recommended loan providers where you can start your research to find the right lender for you. Most lenders typically offer between 4% - 13% interest rates; however, fluctuating rates and your credit score (among other factors) will impact the interest rates you pay. 

Even though the low-interest rates are appealing, it’s likely you won’t qualify for them. Not to mention, private student loans carry more risk than federal student loans. Where federal student loans offer protection plans such as IDR (income-driven repayment) plans or student loan forgiveness, private student loans don’t include those same options. 

Keep in mind that private student loans can be entirely useful, especially if you exhaust all federal student loan options but still require more money for school. Private student loans can fill in the gap so you can complete your education. There is also an opportunity to refinance your private student loans in order to obtain a better interest rate. To learn more about private student loans, read Understanding Private Student Loans

understanding student loan interest rates
understanding student loan interest rates

Loan Term Impact

Interest rates may determine how much money you pay back on your student loans, but the length of time you agree to repay that loan also has a massive impact. Even though extending your repayment plan over a longer period of time allows you to pay lower monthly payments, you end up paying MUCH more in interest. 

We offer a great example:

Student Loan Term Calculator Comparison Chart Example.

As you can see from this table, the longer you hold onto your loan, the more it ends up costing you. The 5-10 year plans may force you to pay off student loans faster -- meaning higher monthly payments -- but the 25 year plan may cost you an additional $20,000 in the end due to accruing interest. 

Understanding how interest rates impact your overall student debt is essential. Shop around to determine the best option for you and your financial future.

understanding student loan interest rates
understanding student loan interest rates
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Where Do I Start?

Not sure what lenders are looking for in the initial refinancing application?
We've put together a detailed checklist of everything you need!

From $100K In Student Loans To Debt-Free In 28 Months


Our Finding The Right Student Loan Repayment Plan Guide Can Help.