Parents, you’ve probably started planning and saving for your child’s college education. But are you also preparing your high schooler to borrow responsibly for college?
Student loan interest rates are an important piece of the puzzle. If student loans are part of the plan to pay for your child’s college education, now is the time to start teaching your child how student loans work.
What to teach your high schooler about student loan interest rates
Your child should know what student loan rates are and understand the impact they’ll have on their costs and future. Every college-bound high schooler should be able to answer the following questions about interest rates.
1. What are student loan interest rates?
Start simple with how borrowing and interest work. A student loan is money you borrow and have to repay. That’s often done in monthly installments, which are more affordable than repaying the loan at once.
“It is imperative that a student understands loans are not free money but money that has to be paid back at a later time with interest,” said Ivette Chavez, the lead college financial services coordinator of the College & Alumni Program.
Make sure your student understands that, on top of their initial balance, they’ll pay fees, such as origination fees and other upfront costs, in addition to interest.
Student loan interest rates are sort of like price tags on student loans. They show how much your child will pay as they carry a balance on their student loans.
2. How do student loan interest rates work?
Student loan interest rates tell you and your child how much you’ll pay to borrow money for college. But it’s important to understand exactly how lenders use these rates to charge interest.
Federal student loans use simple annual interest rates, which don’t take into account compounding interest (interest you pay on accrued interest) or fees. While they’re written as annual rates, lenders assess and charge student loan interest on a daily basis.
To charge interest daily, lenders use a daily interest rate that’s calculated by dividing the annual interest rate by 365 (the number of days in a year). For an annual interest rate of 5.00%, for example, the daily interest rate would be 0.0137% — or $1.37 in interest per day if your loan amount was $10,000.
Interest charges are also compounded into the loan. So the next day, the 0.0137% daily interest rate would be charged on the new balance of $10,001.37.
It’s important to note that federal and private student loans use different kinds of rates. Federal student loans use simple rates, but most private student loan rates are written as annual percentage rates (APRs). These APRs include both fees and compounding interest. Learn more about how APRs differ from interest rates.
3. When will your student loan interest rate apply?
Students also should be aware that their student loan rates likely will take effect as soon as they take out a loan.
Most students choose to defer loan repayment until after college, but the interest you’re charged will be added to your student loan balance as soon as you take out the loan.
Keep in mind that student loans your child borrows early in their college career could cost more since they’ll accrue interest the longest.
4. What is a student loan interest subsidy?
Students who borrow through Direct Subsidized Loans receive a student loan interest subsidy. Interest on these loans is paid for by the Department of Education while you’re enrolled in school.
“Direct Subsidized Loans are the best option to finance a college education because they don’t accrue interest,” Chavez said. “This means the amount you borrow today will remain the same until you complete your degree. There is no interest added to your principal balance.”
You can apply for Direct Subsidized Loans and other federal student aid by submitting a Free Application for Federal Student Aid (FAFSA). If you qualify, using Direct Subsidized Loans first could save you hundreds of dollars in interest.
5. What is the interest rate on student loans today?
Most student loans fall into one of two main categories: federal student loans backed by the government and private student loans offered by banks and other lenders. Different types of student loans will have different ways of calculating and setting your interest rates.
Here are the interest rates on federal student loans for 2017-18:
- Direct Subsidized Loans are federal student loans offered directly to students. They carry a one-time loan fee of 1.066% and interest rates of 4.45%.
- Direct Unsubsidized Loans have the same terms as Direct Subsidized Loans but without an interest subsidy.
- Parent PLUS Loans are available to parents of undergraduate students. They’re more expensive, as they charge a one-time fee of 4.264% and student loan interest rates of 7.00%.
Each student or parent who takes out a federal student loan pays the same student loan rates.
Private lenders, however, customize their rates based on the individual borrower’s credit score and loan terms. Your student will get better-than-average student loan interest rates on private loans only if they have excellent credit (or a cosigner who does).
6. Will your student loan interest rates change?
The short answer is yes. Federal student loan rates could change each year your student is in college.
Make sure your high schooler understands how student loan rates are set. All federal student loan rates are calculated based on rules written by Congress. Each year, these federal student loan rates are recalculated based on those rules, which can result in rates rising, falling, or staying the same. Last year, for instance, federal student loan rates rose by 0.69%.
However, while rates on new federal student loans can change each year, rates won’t change on your child’s existing debt. Federal student loans have fixed interest rates, which means they’ll remain the same throughout the life of the loan.
Similarly, most private student loan rates are based on general market conditions. If rates are rising in general (as they currently are), you and your child should expect to pay more each year to borrow with private student loans. If you choose a variable-rate student loan, you could see your student loan rates increase each month.
Understanding student loan interest rates is key to borrowing affordably for college. Learning about college costs, student aid, and loans can be a solid investment with big payoffs.
“As [high school students] make their college decision in the spring of their senior year, they will have the foundation to be able to make the best financial fit decision for themselves and their family,” Chavez said.
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|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.
(1)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.
(2)This informational repayment example uses typical loan terms for a freshman borrower who selects the Deferred Repayment Option with an 8-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 7% variable Annual Percentage Rate (“APR”): 96 monthly payments of $179.28 while in the repayment period, for a total amount of payments of $17,211.20. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
(3)As certified by your school and less any other financial aid you might receive. Minimum $1,000.
Information advertised valid as of 5/22/2019. Variable interest 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.
4 Important Disclosures for Discover.
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.
©2019 SunTrust Banks, Inc. SUNTRUST, the SunTrust logo and Custom Choice Loan are trademarks of SunTrust Banks, Inc. All rights reserved.
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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
|3.99% – 11.32%2||Undergraduate, Graduate, and Parents|
|4.50% – 11.35%*,3||Undergraduate and Graduate|
|4.84% – 13.49%4||Undergraduate and Graduate|
|4.25% – 11.30%5||Undergraduate and Graduate|
|4.50% – 9.47%6||Undergraduate and Graduate|
|3.74% – 9.72%7||Undergraduate, Graduate, and Parents|
|4.45% – 12.32%8||Undergraduate, Graduate, and Parents|