What you need to know about student loan interest rates

Since student loans bear interest, you end up paying more money than you originally borrowed. This is why it is essential to shop around for the best interest rates for your student loans before borrowing.

We’ll get you started with some key information on how student loan interest works. We’ll also explain federal and private student loan interest rates so you can take out a new loan with a better idea of ​​what you’ll pay when you borrow for your education.

Understanding Federal Student Loan Interest Rates

Federal student loan interest rates are set by the government. The rates are standardized, which means that everyone who qualifies pays the same interest rate, but they can change from year to year.

Federal student loan rates have gone up and down, so it’s important to know the interest charges before you borrow. This table shows how student loan interest rates have fluctuated over the past five years for different types of federal student loans.

Type of loan Direct subsidized loans Direct unsubsidized loans for undergraduates Direct unsubsidized loans for graduate students Direct PLUS Loans
Who is the loan intended for? Undergraduate students with demonstrated financial need Undergraduate students whatever the need Graduate students whatever their needs Graduate students or dependent parents of undergraduate students
Interest rates for 2014-15 4.66% 4.66% 6.21% 7.21%
Interest rates for 2015-16 4.29% 4.29% 5.84% 6.84%
Interest rates for 2016-17 3.76% 3.76% 5.31% 6.31%
Interest rates for 2017-18 4.45% 4.45% 6.00% 7.00%
Interest rates for 2018-19 5.05% 5.05% 6.60% 7.60%
Interest rates for 2019-20 5.05% 5.05% 6.60% 7.08%
Note: The new rates come into effect on July 1 of each year.

These interest rates can inflate your loans. For example, if you had an average student loan balance of $ 39,400 with an interest rate of 5.05% and a monthly payment of $ 419, you would pay over $ 10,800 in interest charges over 10 years. . In total, you would reimburse more than $ 50,000.

But there are ways to save money on interest, including refinancing student loans at a lower rate or paying off your loans faster.

Once you fully understand how student loan interest rates work, you can create a plan that works for your finances and helps you pay less interest over time.

Understanding Private Student Loan Interest Rates

Although federal student loan interest rates are standardized by the government, private student loan rates vary much more because lenders can decide how much interest to charge borrowers.

It’s important to shop around for private student loan providers to compare interest charges and find your best student loan rates. A good start might involve going through our list of our favorite lenders to get a feel for the deals available. That said, note that rates fluctuate and your credit score and other factors affect the interest you will pay.

At first glance, these private student loans may seem tempting because they can start at lower interest rates than the federal ones. But it is more difficult to qualify for these low rates, and these loans can carry more risk than federal student loans.

That’s because federal student loans come with protections like access to income-tested repayment plans (IDRs), forbearance and deferral, and even student loan forgiveness options. With private loans, you don’t have access to benefits like IDR plans or forgiveness.

But private student loans can be a useful tool. If you’re exhausting all of your federal student loan options and still need more money to graduate, private loans can help fill the void so you can attend and complete your education.

The term of your loan affects the amount of student loan interest you pay

Your interest rate is one of the main factors in determining how much you pay back on your federal or private student loans. But the time you take to pay off your loan also has a big impact.

If paying off your loan over a longer period allows you to have lower monthly payments, this approach means you’ll pay a lot more interest. You can use our Student Loan Term Comparison Calculator to estimate how loan terms might affect the total amount you would pay. We did that for you below with a $ 28,000 loan at 5% interest to show how important repayment periods are.

Source: Student Loan Term Comparison Calculator

As you can see, the longer you hold the loan, the more it will cost. While the five-year plan comes with much higher monthly payments, following the 25-year plan will ultimately cost you $ 17,402 more.

How to reduce the student loan interest you pay

Since the interest charges on student loans can dramatically increase your education costs, it’s a good idea to explore options to lower your spending. Following these steps could help save you money.

1. Before borrowing: apply for scholarships and grants
2. Once you have borrowed: try to increase your income to pay off your loans faster.
3. Once you’re stable: refinance your student loans

1. Before borrowing: apply for scholarships and grants

One of the best things you can do is apply for grants and scholarships. Unlike student loans, which you have to pay back, scholarships and grants are money that you don’t have to pay back. Plus, you can apply for and receive multiple grants and scholarships, reducing the amount you need to borrow on student loans.

Spend an hour or two each week researching grants and scholarships and submitting applications. You can also meet with your college’s financial aid office to see if there are any institutional aid programs you qualify for.

2. Once you have borrowed: try to increase your income to pay off your loans faster.

Besides scholarships, starting a high paying college business can make a huge difference in reducing your dependence on student loans.

And if you’ve already graduated, you can also look for side opportunities that you can do while working full time. If you apply all the extra income directly to your loans, you can really speed up the repayment. Our additional payment calculator shows the impact of these additional payments.

3. Once you’re stable: refinance your student loans

Once you’ve graduated, refinancing your student loans can be a great option to lower your interest rates.

When you refinance your loans, you can take out a new loan with completely different repayment terms. You might qualify for a loan with a lower interest rate, a different repayment period, and even a lower monthly payment.

Refinancing has a few drawbacks to keep in mind. For example, if you refinance federal loans, you will lose access to IDR plans and loan cancellation. You also won’t get protections for borrowers, such as the ability to defer loan payments.

But if you’re trying to get out of debt as quickly as possible, refinancing with a low-interest loan can help you pay off your loan sooner than you expect.

Understanding How Student Loan Interest Works Helps You Make Wise Choices

For new and current borrowers, student loan interest rates can be extremely frustrating. After all, it’s bad enough to come of age with tens of thousands of dollars in debt, let alone having to pay interest on it.

But now that you know what factors determine the interest you pay, you can make smart choices about dealing with your debt. You can also use these strategies to lower your interest rate as much as possible.

Rebecca Safier and Shannon Insler contributed to this post.

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