It’s easy to focus on the principal you owe on your student loan debt while almost forgetting about the fact that it will be charged interest as well. Society sometimes seems so accepting of the long haul of student loan repayment that it’s easy to disregard the fact that these loans will cost more the longer it takes to repay them.
So how dangerous is this? If you were like a typical student loan borrower from the Class of 2016, you would have graduated with an average of $37,172 in student loan debt. For federal student loans, that could come with an interest rate of 4.5%. Add that up over the total repayment period, and you’re looking at a $48,069 bill for your education.
In other words, the interest would add another $10,357 to your loan balance over the whole repayment period.
But that doesn’t mean you have to be an interest rate victim. Once you fully understand how student loan interest rates work, you can create a plan that works for your finances and potentially helps you pay less interest over time.
This guide to student loan interest rates — including current student loan rates — can help.
How student loan interest rates work
Even though you probably already know your annual interest rate on your student loans, it’s helpful to understand what that comes out to each month.
And you can use this student loan comparison calculator to find out. It can also show you how much your loans will cost over time:
As you can see, the longer you hold the loan, the more it will cost. Although the five-year plan comes with much higher monthly payments, following the 25-year plan will cost you $17,402 extra in the end.
In all cases, the interest on your student loans means you’ll be paying more than what you borrowed to go to school. Even on the shortest payment plan, you’d be forking over $3,704 more than you originally received.
Current student loan rates on federal and private loans
You can find past and current student loan rates and fees for federal student loans at Federal Student Aid. Below are the rates for federal loans disbursed on or after July 1, 2017, and before July 1, 2018. It’s important to note that these rates are set by Congress and can change each year. Perkins Loans, on the other hand, don’t change.:
- Perkins Loans — 5%
- Direct Subsidized Loans for undergraduates — 4.45%
- Direct Unsubsidized Loans for undergraduates — 4.45%
- Direct Unsubsidized Loans for graduate or professional students — 6%
- Direct PLUS Loans taken out by parents or graduate or professional students — 7%
So where do these rates stand compared to the past? Here’s a chart comparing them to the previous year:
|Federal student loan type||2016-17 student loan rates||2017-18 student loan rates|
|Federal Stafford Loan (Undergraduate)||3.76%||4.45%|
|Federal Stafford Loan (Graduate)||5.31%||6.00%|
|Federal Grad PLUS Loan||6.31%||7.00%|
|Federal Parent PLUS Loan||6.31%||7.00%|
It’s important also to note that your loans can be subsidized or unsubsidized. Subsidized loans don’t accrue interest as long as you’re in school full-time or within your repayment grace period, because the Department of Education pays the interest. Unsubsidized loans start accruing interest right away (although the interest will be added to the principal you owe on your loan if you choose not to pay it immediately).
Federal student loans, with the exception of Perkins Loans, also come with a disbursement fee, which is tacked on to your loans when you borrow. The fees for loans disbursed on or after October, 1, 2017, and before October 1, 2018, are:
- Direct Subsidized Loans and Direct Unsubsidized Loans — 1.066%
- Direct PLUS Loans — 4.264%
And how do private student loans stack up?
Private student loans are a little harder to track because they will vary by lender. The current student loan interest rates from top private student loan lenders range from 3.00% to just over 12%.
At first glance, private student loans might be tempting since they can start at lower interest rates than federal ones. But these loans also carry more risk than federal student loans.
That’s because federal student loans come with protections such as income-driven repayment plans, federal forbearance and deferment, and even student loan forgiveness options. Private student loans don’t carry any student loan forgiveness options — and whether or not they will enable you to suspend your loan payments temporarily will depend on your lender and your economic situation.
Michael Lux of Student Loan Sherpa says there’s a time for federal loans and a time for private loans (for example, if you’re ready for a refinance):
“Even if federal interest rates are a bit higher, borrowers should treat the slightly higher interest as an insurance policy against future unemployment or underemployment. Students without jobs or degrees should all pursue this protection. Once they graduate, they can always refinance their student loans to get rock-bottom interest rates.”
In his words, “the best of both worlds” is to take out federal student loans for college and then refinance during repayment. However, since refinancing federal student loans turns them into private student loans, it’s best to wait to do this until your employment and income are secure. More on that below.
And if you do refinance, you’ll most often see lower interest rates if you choose a variable rate that changes with the overall rate environment. But that comes with the risk of having no idea what that rate could become in the future.
How to get ahead of the curve on student loan interest rates
Although paying interest on your student loans is unavoidable, there are things you can do to decrease the negative effects of that interest. Follow the steps below to ease the burden of student loan interest rates:
1. Before you borrow: Apply for scholarships and grants
An even better strategy than borrowing more now would be to look into scholarships and grants that help limit your need to borrow at all. Especially when interest rates are on the rise, it’s important to remember that every dollar of educational costs you can cover with scholarships instead of loans will save you even more in repayment.
Devote an hour or two every week finding and applying for grants and scholarships. You can also meet with your college’s financial aid office to see if there are institutional aid programs for which you qualify.
2. Once you borrow: Try to boost your income to pay your loans down faster
In addition to scholarships, working more or ramping up a high-paying college side hustle can make a huge difference in limiting student loans.
Even if you’re working a low-paying, on-campus job, remember that what you earn now will help you save big on interest later. In fact, every $1 you don’t borrow in federal Direct Loans will save you $1.24, after accounting for interest.
And if you’ve already graduated, you can also look into side hustle opportunities that you can do while working full-time. If you apply all the extra income straight to your loans, you can really get ahead on repayment. Here’s a calculator to see what extra payments can do for your student loan debt payoff.
One word of advice: Contact your student loan servicer before making extra payments to be sure the extra funds are going to reduce principal rather than be applied to future payments. You can also select this option online with some student loan servicers.
3. Once you’re stable: Refinance your student loans
Once you graduate, refinancing your student loans can be a great option for lowering your interest rates — once your career and income are stable, that is.
It’s important to note that you’ll be presented with a variety of repayment terms when you apply for student loan refinancing offers. These terms will include variable and fixed interest rates, as well as terms of anywhere from five to 20 years.
And remember, the variable rate option will likely come with the lowest rate, but it can be a risk. Your rate can then increase at any time.
It might be tempting to take on a longer repayment plan since that will have a lower monthly payment. But if you want to get out of debt faster and pay less interest, a shorter repayment plan is best.
Finally, as with other private student loans, refinanced student loans are not eligible for programs such as income-driven repayment plans or federal student loan forgiveness. If you don’t think you’ll need these programs because you’re in a stable economic situation, that might be okay. Just make sure you’re ready to forfeit these options before you refinance.
Student loan interest rates are all in how you handle them
For new and current borrowers alike, student loan interest rates can be extremely frustrating. It might seem bad enough to enter adulthood with up to tens of thousands of dollars in debt, much less to have to pay interest on it.
Although having to pay interest seems like another point in a long list of why student loans suck, don’t forget that these loans have some upsides as well. For example, student loans can help you get an education, which can help you increase your earning potential and your job opportunities. Also, paying on time every month on your student loans can help you build credit without taking out a credit card, which can be more tempting to use and comes with much higher interest rates.
If you have to take out student loans for college, be aware of current student loan rates, but also look at the steps you can take to borrow less and also eventually lower those rates. In the end, just like college, it’s all in what you make of it.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Rates (APR)||Eligible Degrees|
|Check out the testimonials and our in-depth reviews!|
|2.65% - 7.14%||Undergrad & Graduate||Visit SoFi|
|2.99% - 6.99%||Undergrad & Graduate||Visit Laurel Road|
|2.57% - 6.32%||Undergrad & Graduate||Visit Earnest|
|2.56% - 8.12%||Undergrad & Graduate||Visit Lendkey|
|2.57% - 6.49%||Undergrad & Graduate||Visit CommonBond|
|2.63% - 8.34%||Undergrad & Graduate||Visit Citizens|
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