If you’ve ever shopped for private student loans, you might have come across a few advertised annual percentage rates (APRs). But if you head to the Federal Student Aid website, the acronym isn’t listed behind federal student loan rates.
There’s a good reason for that: Federal student loan rates are not the same as the listed APRs on private student loans. If you try to choose between federal and private student loans based on these rates, you’ll be comparing apples to oranges.
So how can you make the best choice? We break down why student loan APRs are important to consider when deciding how to borrow for college.
Why pay attention to student loan APRs?
An APR reflects all the costs of a loan, including compounding interest and mandatory loan fees.
Private student loans all carry an APR, but advertised APRs won’t always reflect what you’ll pay. Advertised rates are usually the lowest the lender has to offer, while your APR will be based on your or your cosigner’s creditworthiness.
To get a more accurate picture of your costs, you can request a student loan rate quote. Just make sure the lender uses a soft credit check, which can deliver a personalized offer without affecting your credit score.
Since APRs include the total costs of borrowing, they can help you quickly compare different student loans. Instead of weighing each fee or basis point on your interest rate, you can simply see which APR is lowest to find the best deal.
This comparison trick will work as long as you’re comparing private student loans to each other. It’s when you’re trying to compare private lenders’ APRs to federal student loan rates, however, that things get hairy.
Calculating federal student loan APRs
Federal student loan interest rates are set each year. Although these rates reflect interest charges, they don’t include federal student loan fees.
Yet these fees can be significant. For Direct Subsidized and Unsubsidized Loans, you’ll pay a 1.066% fee on loans disbursed before Oct. 1. On PLUS Loans, the fee is 4.264%. These are taken out of the funds you borrow, so you’ll actually receive your requested amount minus the fee.
These fees are communicated clearly enough. But without a clear APR listed on federal student loans, it can be difficult to compare terms with private student loans.
To help overcome this issue, we calculated what the APR would be on federal student loans if they included origination fees. These calculations are based on a standard 10-year repayment plan for a $10,000 loan. Note that these amounts don’t include interest you might be charged while you’re in college or if you put your loans into deferment.
|Loan||Interest rate||Loan fee rate||Loan fee cost||APR|
|Direct Unsubsidized and Subsidized Loans||4.45%||1.066%||$107||4.6807%|
|Direct Unsubsidized Loans for grad students||6.00%||1.066%||$107||6.2375%|
For Direct Subsidized and Unsubsidized Loans, the federal student loan fee is enough to add almost a quarter percentage point to the annual effective rate. For PLUS Loans, the higher fee adds nearly a whole percentage point to the APR.
These federal student loan APRs will be the same for any student loan balance that’s repaid on a standard 10-year plan.
Comparing APRs on federal and private student loans
Private student loan rates won’t always beat federal student loan rates. But for some college students, particularly those who can apply with a qualified cosigner, private lenders can be the better deal.
Effectively comparing these two options, however, will require looking at APRs. This chart puts federal student loan APRs up against advertised APRs on private student loans (assuming a 10-year term and $10,000 balance).
|Loan||Interest rate||Loan fee rate||Loan fee cost||APR|
|Unsubsidized and Subsidized Loans||4.45%||1.066%||$107||4.6807%|
|Unsubsidized Loans for grad students||6.00%||1.066%||$107||6.2375%|
|Citizens Bank (Private)||—||—||$0||4.45%|
Although this comparison shows that borrowers could see lower APRs with private lenders, you should keep in mind that only those with top-notch credit will qualify for the lowest rates. That means private lenders could be a better option for parent borrowers or students with a cosigner.
Further, federal student loans come with benefits that are worth taking into account. For example, with federal loans, you gain access to repayment plans that can make it easier to manage your debt. You could also qualify for loan forgiveness.
Be sure to weigh your options. And check out the best private student loans as you research.
Can you lower your student loan APR?
Whether you decide to go with a federal or private student loan, you aren’t stuck with your original interest rate.
There are a few ways to lower your student loan rates:
- Refinance with a private lender. If you don’t have good enough credit to qualify for low rates now, you can always try again later. Many borrowers can use this move to lower their rates, especially if they refinance student debt that came with high costs, such as PLUS Loans.
- Enroll in autopay. For both private lenders and federal loan servicers, it’s pretty standard to offer a 0.25% rate discount for borrowers who enroll in autopay. Autopay authorizes automatic payment withdrawals from your bank account. Fair warning: This discount is included in most private student loan APRs, so make sure you’re accounting for this when comparing rates.
In the end, it’s easiest to make sure you’re choosing the most affordable option from the get-go. So compare all costs of both private and federal student loans, and find the option that saves you the most.
Need a student loan?Here are our top student loan lenders of 2019!
|1 Important Disclosures for Ascent.
Before taking out private student loans, you should explore and compare all financial aid alternatives, including grants, scholarships, and federal student loans and consider your future monthly payments and income. Applying with a cosigner may improve your chance of getting approved and could help you qualify for a lower interest rate. Ascent Student Loans may be funded by Richland State Bank (RSB). Ascent Student Loan products are subject to credit qualification, completion of a loan application, verification of application information and certification of loan amount by a participating school. Loan products may not be available in certain jurisdictions, and certain restrictions, limitations; and terms and conditions may apply. Ascent is a federally registered trademark of Turnstile Capital Management (TCM) and may be used by RSB under limited license. Richland State Bank is a federally registered service mark of Richland State Bank.
* Application times vary depending on the applicants ability to supply the necessary information for submission.
2 Important Disclosures for College Ave.
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
Information advertised valid as of 4/1/2019. Variable interest rates may increase after consummation.
3 Important Disclosures for Discover.
* The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of Smart Option Student Loan customers.
4 = Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
5 Important Disclosures for SunTrust.
Before applying for a private student loan, SunTrust recommends comparing all financial aid alternatives including grants, scholarships, and both federal and private student loans. To view and compare the available features of SunTrust private student loans, visit https://www.suntrust.com/loans/student-loans/private.
Certain restrictions and limitations may apply. SunTrust Bank reserves the right to change or discontinue this loan program without notice. Availability of all loan programs is subject to approval under the SunTrust credit policy and other criteria and may not be available in certain jurisdictions.
SunTrust Bank, Member FDIC. ©2019 SunTrust Banks, Inc. SUNTRUST, the SunTrust logo and Custom Choice Loan are trademarks of SunTrust Banks, Inc. All rights reserved.
6 Important Disclosures for LendKey.
Additional terms and conditions apply. For more details see LendKey
7 Important Disclosures for CommonBond.
A government loan is made according to rules set by the U.S. Department of Education. Government loans have fixed interest rates, meaning that the interest rate on a government loan will never go up or down.
Government loans also permit borrowers in financial trouble to use certain options, such as income-based repayment, which may help some borrowers. Depending on the type of loan that you have, the government may discharge your loan if you die or become permanently disabled.
Depending on what type of government loan that you have, you may be eligible for loan forgiveness in exchange for performing certain types of public service. If you are an active-duty service member and you obtained your government loan before you were called to active duty, you are entitled to interest rate and repayment benefits for your loan.
A private student loan is not a government loan and is not regulated by the Department of Education. A private student loan is instead regulated like other consumer loans under both state and federal law and by the terms of the promissory note with your lender.
If your private student loan has a fixed interest rate, then that rate will never go up or down. If your private student loan has a variable interest rate, then that rate will vary depending on an index rate disclosed in your application. If the interest rate on the new private student loan is less than the interest rate on your government loans, your payments will be less if you refinance.
If you don’t pay a private student loan as agreed, the lender can refer your loan to a collection agency or sue you for the unpaid amount.
Remember also that like government loans, most private loans cannot be discharged if you file bankruptcy unless you can demonstrate that repayment of the loan would cause you an undue hardship. In most bankruptcy courts, proving undue hardship is very difficult for most borrowers.
8 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|4.24% – 13.24%1||Undergraduate and Graduate|
|4.07% – 11.32%2||Undergraduate, Graduate, and Parents|
|4.84% – 13.49%3||Undergraduate and Graduate|
|4.50% – 11.35%*,4||Undergraduate and Graduate|
|4.25% – 13.25%5||Undergraduate and Graduate|
|6.08% – 7.22%6||Undergraduate and Graduate|
|3.95% – 9.81%7||Undergraduate, Graduate, and Parents|
|4.45% – 12.42%8||Undergraduate, Graduate, and Parents|