You Might Be Paying More on Your Federal Student Loans Than You Think

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Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.

federal student loan application with a pen

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%
PLUS Loans 7.00% 4.264% $426 7.9866%

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%
PLUS Loans 7.00% 4.264% $426 7.9866%
Citizens Bank (Private) $0 3.94%
LendKey (Private) $0 4.63%

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 2018!
LenderRates (APR)Eligibility 

1 = Citizens Disclaimer.

2 = CollegeAve Autopay Disclaimer: All rates shown include the auto-pay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.

* 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.

3 = Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
3.54%
12.07%
2
Undergraduate, Graduate, and ParentsVisit CollegeAve
3.95% – 12.10%Undergraduate and GraduateVisit Ascent
4.00% – 11.85%*3Undergraduate and GraduateVisit SallieMae
3.94%
12.19%
1
Undergraduate, Graduate, and ParentsVisit Citizens
4.63% – 9.71%Undergraduate and GraduateVisit LendKey
3.62%
9.79%
Undergraduate, Graduate, and ParentsVisit CommonBond
Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.