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Since you don’t have to pay your student loans while you’re in school or for six months after you graduate, it’s easy to forget about them. But most student loans accrue interest from the date they’re disbursed, meaning you could owe more than you realize once your grace period ends.
So that you’re not caught unaware, it’s crucial to understand when interest begins accruing on student loans and what your student loan interest rates are.
To learn more about interest rates on student loans and how they impact your balance, let’s go over these topics:
- How student loan interest rates work
- How lenders determine student loan rates
- Average student loan interest rates
- Student loan interest start dates
- How to reduce the interest you pay on your student loans
When borrowing money to pay for college, lenders need something in return to make the deal beneficial for both parties. That’s where student loan interest rates apply. They’re typically marketed as an annual percentage rate (APR), but interest charges are added to your balance and paid monthly.
The APR on your loan will depend on a few factors and can even change over time, depending on whether you have fixed or variable interest rates.
Federal student loan interest rates are set by Congress and are tied closely to the 10-year Treasury note, plus an additional percentage.
Loan servicers aren’t able to set their own rates on federal student loans, and most loans have a fixed rate through the entire term. Interest rates are set each spring before a new school year.
Private lenders, on the other hand, determine their own student loan rates based on a risk-based pricing model. This means that they offer a range of interest rates, and the rate you receive when you get approved is based on how risky of a borrower you are.
Each lender has different criteria for determining interest rates, as well as varying rate ranges. Private lenders consider your credit history, income and other factors when determining your rate. Private student loan rates can either be fixed or variable.
The average student loan interest rate depends on the type of student loan you get. Federal loans tend to charge lower interest rates for undergraduates, especially considering there’s no credit check as with private student loans.
But graduates and parents may find it worthwhile to compare federal loan rates with rates from private lenders.
Federal student loan interest rates, 2020-2021
Federal student loan interest rates can change each year. Here are the interest rates you will pay for federal student loans during the 2020-21 school year.
|Loan type||Eligible borrowers||2020-2021 rates|
|Direct unsubsidized||Graduate and professional students||4.3%|
|Direct graduate PLUS||Graduate and professional students||5.3%|
|Direct parent PLUS||Parents||5.3%|
Average student loan interest rates from private lenders
Because private lenders can set their own rates according to their own underwriting standards, the average student loan interest rate is based on a wide range. To give you an idea of what to expect, here are a few top private student lenders.
|Lender||Eligible borrowers||Variable Rate||Fixed Rate|
|College Ave Student Loans||Students and parents||1.09% – 11.98%||3.49% – 12.99%|
|Sallie Mae||Students and parents||1.25% – 11.10%||4.25% – 12.35%|
|Citizens Bank||Students and parents||1.23% – 11.38%||4.25% – 11.95%|
In most cases, your student loan interest starts accruing the day you take out your loan. The only exception is Direct subsidized loans. On these need-based loans, the federal government pays your interest while you’re in school and during the six-month grace period after you leave.
But once that grace period is over, you become responsible for paying back both the principal and interest.
If you took out Direct unsubsidized loans, Direct PLUS loans or private student loans, interest accrues unpaid while you’re in school. If you don’t make interest-only payments, the accrued interest capitalizes and is added to your principal balance.
Going forward as you make payments, your student loan servicer will require you to pay off any late fees and accrued interest before applying any part of your payment to your principal balance.
Here’s how your interest gets calculated:
Interest Rate x Current Principal Balance ÷ Number of Days in the Year = Daily Interest
As an example, let’s say your current balance is $32,037 and your interest rate is 6.38%. Plug these numbers into the formula and you get:
6.38% x $32,037 ÷ 365 = $5.60 a day
The higher your balance and your student loan interest rates, the more interest will accrue on a daily basis.
There are ways to reduce the amount of interest you pay over the life of your loans. The best way is to pay off your loans as quickly as possible. Since interest accrues every day, the faster you pay off your debt, the less interest will accumulate. It’s also useful to put your loans on autopay if you can afford to, since doing so will automatically get you a rate discount of 0.25%.
If you have unusually high interest rates on your federal loans, you can also potentially refinance them into a private loan at a lower interest rate. This can save you thousands of dollars over the life of your loan.
Ultimately, the faster you pay off your loans, the better. Now that you understand how interest is calculated and added to your bill, you know how important it is to eliminate your student loan debt while paying as little interest as possible.
Interested in refinancing student loans?Here are the top 6 lenders of 2020!
|Lender||Variable APR||Eligible Degrees|
|1.89% – 6.66%1||Undergrad & Graduate|
|1.89% – 5.90%2||Undergrad & Graduate|
|2.25% – 6.09%3||Undergrad & Graduate|
|1.99% – 5.34%4||Undergrad & Graduate|
|1.97% – 8.54%5||Undergrad & Graduate|
|2.39% – 6.01%||Undergrad |
|Check out the testimonials and our in-depth reviews! |
1 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of October 1, 2020.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of September 9, 2020. Information and rates are subject to change without notice.
3 Important Disclosures for SoFi.
4 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 2.98% APR (with Auto Pay) to 5.49% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.34% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of October 26, 2020, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 10/26/2020. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.
© 2020 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
5 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of 5 years and is reserved for applicants with FICO scores of at least 810.
As of 11/13/2020 student loan refinancing rates range from 1.97% to 8.54% Variable APR with AutoPay and 2.95% to 8.77% Fixed APR with AutoPay.