It’s easy to focus on the principal you owe on your student loan debt while forgetting about the interest charges. When it comes to student loan repayment, it’s easy to disregard the fact that these loans might cost far more than you originally borrowed.
For federal student loans, these are the interest rates you can expect:
|Federal Student Loan Type||Borrower Type||Interest Rate|
|Direct Subsidized Loan||Undergraduate students with financial need||4.45%|
|Direct Unsubsidized Loan||Undergraduate students||4.45%|
|Direct PLUS Loan||Graduate students or Parents||7.00%|
|Direct Consolidation Loan||All federal loan borrowers||Weighted average of consolidated loans|
Those interest rates can cause your loans to balloon. For example, if you had $37,172 in student loans with a 4.5% interest rate, you’d pay over $10,000 in interest fees. In total, you’d pay back $48,069.
However, there are ways to save money. 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.
How student loan interest rates work
Once you know your interest rate, it’s helpful to understand how your repayment term can affect how much you pay in interest. Although many people opt for a longer repayment term to get a lower monthly payment, that approach can cost you.
You can use the student loan comparison calculator to find out how much you’d pay in total under different repayment plans:
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.
How do private student loans stack up?
The interest rates on private student loans vary from lender to 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 might carry more risk than federal student loans.
That’s because federal student loans come with protections such as access to income-driven repayment (IDR) plans, federal forbearance and deferment, and even student loan forgiveness options. With private loans, you don’t have access to perks like IDR plans or forgiveness.
However, private student loans can be a useful tool. If you exhaust all of your federal student loan options, and still need more money to complete your degree, private loans can help fill the gap so you can finish school.
How to get ahead of the curve on student loan interest rates
Because student loan interest fees can add so much to your education costs, it’s a good idea to explore other options to reduce your expenses. Following these steps can help you save money:
1. Before you borrow: Apply for scholarships and grants
One of the best things you can do is to apply for grants and scholarships. Unlike student loans, which you have to repay, scholarships and grants are free money you don’t have to pay back. Plus, you can apply for and receive multiple grants and scholarships, lowering how much you need to borrow in student loans.
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, launching a high-paying college side hustle can make a huge difference in reducing your reliance on 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.
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.
When you refinance your loans, you can take out a new loan with completely different repayment terms. You could qualify for a loan with a lower interest rate, different repayment term, and even a lower monthly payment. Refinancing has some drawbacks to keep in mind. For example, if you refinance federal loans, you’ll lose out on access to IDR plans.
However, if you’re focused on become debt-free as quickly as possible, refinancing with a lower-interest loan can help you pay off your loan ahead of schedule.
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 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.
If you have to take out student loans for college, 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|
|Get real rates from up to 4 Lenders at once
Check out the testimonials and our in-depth reviews!
|2.56% - 7.40%||Undergrad & Graduate||Visit SoFi|
|2.57% - 6.32%||Undergrad & Graduate||Visit Earnest|
|2.58% - 8.12%||Undergrad & Graduate||Visit Lendkey|
|2.80% - 7.02%||Undergrad & Graduate||Visit Laurel Road|
|2.54% - 6.65%||Undergrad & Graduate||Visit CommonBond|
|2.90% - 8.34%||Undergrad & Graduate||Visit Citizens|