As you consider how to pay for college and begin to familiarize yourself with how student loans work, you’ll probably wonder how much interest rates are for student loans. Your student will have to pay back more than the principal alone – interest can dramatically increase the overall cost of school.
The good news is that it’s possible to know ahead of time how much student loan interest rates are, and to make wise choices for financing.
Federal Student Loans
Federal loans are the easiest to understand, because they all have the same interest rates and fees. When you’re looking at a federal loan, they all come from the government and have standardized policies and terms.
Between July 1, 2018 and June 30, 2019, interest rates are as follows:
- New subsidized and unsubsidized Stafford loans: 5.045%
- Graduate Stafford loans: 6.595%
- Parent PLUS loans: 7.595%
- Perkins Loans: 5 percent
These fixed rates apply for the life of the loan. Every July 1, the government updates the interest rates, but the new rates only apply to new loans taken out during the year.
Federal laws can impact interest rates, of course, so it’s important to keep an eye on what Congress is considering as far as student interest rates and loan policies.
Federal loans have fees that are based on the amount borrowed. The fees are a set percentage of the award amount, and are deducted proportionally from each disbursement.
As of July 1, 2017, new Direct Subsidized and Unsubsidized Loans have a fee of 1.066 percent. Parent PLUS Loans have a fee of 4.264 percent, but may change on October 1, 2018.
There are no fees for Perkins Loans.
Subsidized vs. Unsubsidized Loans
Another important element in federal student loans is whether or not they are subsidized. If they are, your student will pay less because interest will not accrue while they are in school full-time, or during the repayment grace period.
Unsubsidized loans accrue interest right away. Your student can either make the interest payments during school, or they can be added to the loan.
If you add the interest to the loan, the amount owed will be larger and the subsequent interest will be more, because it will be charged on the higher amount owed.
Private Loan Interest Rates
Private loans are an entirely different beast. There are dozens of banks willing to originate these loans, and they can have a wide variety of fees, interest rates, and terms.
You want to make sure you fully understand the terms of each loan you and your student agree to. Interest will probably start accruing immediately, similar to an unsubsidized federal loan. However, you may or may not have the option to defer those payments until graduation.
Interest rates can vary significantly, and you will encounter both fixed and variable interest rates. While variable interest rates start lower, they introduce a lot of uncertainty because you can’t know what will happen years in the future. It’s usually best to lock in a fixed interest rate if you can.
Some private loans will require your student to have a cosigner. It’s vital that your student choose a trustworthy cosigner. It’s also important for the cosigner to understand the risk, and to find out if there’s a way to remove the cosigner after a certain number of on-time payments.
Finally, private student loans may not have the terms and protections that come with a federal loan. These include income-based repayment, forbearance and deferment options, and forgiveness opportunities.
Comparing Private Loans
Comparing interest rates on private loans can be a major challenge, especially when you’re trying to understand what the real total cost will be. We want to make it easier for you.
Embedded below you’ll find a loan comparison calculator that will give you the true cost of each loan, so you can compare “apples to apples.”
To use the calculator, you need the interest rate, origination fee, and term. The term is the length of the loan, in years.
For each loan, the calculator will show you side-by-side:
- Monthly payment
- Total interest paid
- Total Cost of the Loan
There are even graphs to make it simple to see which loan is the best option for your family.
We want to make it easy to understand student loan interest rates and how they affect your student and your family.
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