The Truth About Student Loans: What You Borrow Isn’t What You’ll Pay

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Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. 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 to help you understand what you are buying. Be sure to consult with 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.

Editorial Note: This content is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by the financial institution.

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With the cost of college on the rise, it’s little surprise that student loan debt is on the rise, too. In fact, there’s a good chance you’ll need to borrow in order cover the cost of your higher education — and it wouldn’t be unreasonable to expect to owe $30,000 after earning your bachelor’s degree.

But just because you borrow $30,000, it doesn’t mean that’s what you’ll repay. Student loan interest rates mean that your final cost could be more than what you expect. Before you sign on the dotted line, it’s important to know what you’re getting into.

How is student loan interest calculated?

“Anytime you borrow money, no matter what it’s for, you are probably going to pay interest,” said Tom Drake, a financial analyst and the founder of Maple Money, a financial education website. “It’s the price you pay for the privilege of borrowing. The lender expects a premium for providing you with the funds you need.”

Drake pointed out that student loan interest is usually lower than other types of unsecured debt, like credit cards and personal loans from banks. However, he said, “even at lower rates, the amounts you borrow to pay for school can mean that you pay thousands of dollars extra in interest.”

How is student loan interest compounded?

Student loan interest rates are expressed as an annual percentage rate. Federal rates are set by Congress each year. Private student loan rates are set by lenders based on financial market rates, particularly what is happening with the London Interbank Offered Rate (LIBOR), a benchmark interest rate used as a reference for many types of loans.

Each year, you have a new student loan that might have a different interest rate, especially on federal loans. At the end of your time in school, you’ll repay your federal loans based on an average interest rate.

You might see a rate of 4.45% for federal loans, but find possibilities ranging from 2.50% (or lower) to 11.85% (or higher) on private loans. In the end, what rate you get with a private student loan depends on a variety of factors, including your credit history. Your federal loan rate, though, is the same no matter your credit history or other circumstances.

Even though student loan rates are expressed as an annual rate, the interest is usually compounded daily. On a $10,000 loan, you might think that a 4.45% interest rate would mean $445 paid in interest during the year, but that’s not the case.

Instead, your annual rate is divided by 365, to get your daily interest rate. So, in the above example, you’d be charged an interest rate of 0.012% each day. At the end of your first day, your interest charge totals $1.20 and it’s added to the $10,000. On the following day, your interest is calculated on $10,001.20. At the end of the year, you’ll pay a total of $455.02 in interest — providing the lender with an extra $10 just because of the way interest is compounded.

When you consider that this daily compounding takes place over all the years you are in school and beyond, you can see how interest charges lead to repaying so much more than you borrow.

Subsidized vs. unsubsidized federal loans

First, you need to know what types of loans you have. For all loans, interest begins accruing as soon as the loan is disbursed. However, you might not be responsible for paying that interest.

When you have a subsidized student loan, the government pays your interest while you’re in school (as long as you are enrolled at least half-time) and during a six-month grace period following your graduation. As a result, your balance after you leave school would be the same as the amount you received in loans.

But the story is different with unsubsidized loans. “Because the government isn’t paying your interest, it accrues and is added to your balance,” explains Katie Brewer, a Certified Financial Planner at advisory firm Your Richest Life. “Your balance grows the whole time you’re in school, and you’ll pay interest on the total amount when you finish.”

Let’s take a look at what happens if you borrow the maximum amount in unsubsidized federal loans each year:

how is student loan interest compounded

The chart assumes that the current 4.45% interest rate on federal loans will hold steady throughout your entire four years. It also assumes that you will accrue interest on your freshman year loans for four years, your sophomore year for three, your junior for two, and your senior year for 12 months.

When you borrow the federal maximum for four years, you end up with $27,000 in student loans. However, you’re also on the hook for $2,849 in interest. When you graduate, you actually owe $29,849. And, of course, the interest keeps piling up during your grace period. When you finally start repaying your loans, you’re looking at more than $30,000 in debt — even though you didn’t borrow that much.

If you have some subsidized loans, though, you might not owe as much, thanks to the government covering your interest charges.

Private student loans

You see a similar story with private student loans, said Drake. Check with your lender to see if there is a grace period after graduation, as well as the ability to put off payments until you finish school. But either way, you’ll still have to watch rates, and realize your balance could grow while you’re getting your education.

“Your student loan interest rates might be higher or lower, and they might be more sensitive to market movements,” Drake said. “Pay attention because you could see your rates rise rapidly, and that could make a big difference later.”

No matter what type of loan you get, Brewer recommended at least paying interest while you’re in school. “It’s possible to make payments on your loans before you graduate, whether you have federal loans or private loans,” she said. “You can save thousands of dollars over the life of your loan just by paying interest during school and while you’re in your grace period.”

How much do you pay back on student loans?

Once you finish your bachelor’s degree and start repaying your loans, interest is still a part of the equation. Let’s say that by the time your accrued interest is added to the original amount you borrowed, you have $30,000 in student debt. With an interest rate of 4.45%, and a standard 10-year repayment, you can see how much you’re likely to owe using the student loan interest rate calculator from Student Loan Hero:

As you can see, over the course of 10 years, you end up paying more than $7,000 in interest. Lengthening your loan term or choosing a repayment plan other than the standard one could lead to even greater repayment amounts.

Take a look at the student loan interest calculator and estimator from the Department of Education. You can see the impact of different repayment plans, including five types of “income-driven repayment” options, which can offer a lower monthly repayment based on how much you earn. (The example below uses an income of $51,022, which is the average starting salary for the class of 2017, according to the National Association of Colleges and Employers.)

how much do you pay back on student loan

Image credit: The Department of Education

All of these plans assume that you are single and will repay your loan within 10 years. If you start with a lower monthly payment to maintain better cash flow, you could see some higher amounts. However, if you work in a qualifying job and take advantage of Public Service Loan Forgiveness (PSLF), you could save money on your student loans, depending on the plan you choose.

But what happens if you don’t use PSLF and you have a lower income? Say you make $35,000 a year, so your income-driven repayment is spread out beyond 10 years. Depending on the plan, you could wind up repaying almost $44,000 over the course of a little more than 15 years.

student loan interest rates

Image credit: The Department of Education

What if you are concerned about cash flow and you decide to refinance to a 20-year term? You could end up paying even more, with a quarter of your total repayment going to cover the interest.

You pay less on a monthly basis, but there’s a hefty price for that improved cash flow.

If you really want to reduce what you pay on your debt, refinancing to a lower interest rate and a shorter term can be the way to go. For borrowers that can qualify for a better interest rate and can handle a higher monthly payment, it’s possible to save thousands of dollars in interest.

student loan interest rates

Finding the best student loan interest rates

No matter what you do, your final bill will be more than what you borrowed. That’s just the nature of debt. However, you can reduce what you end up paying by looking for the best student loan rates.

Initially, there’s nothing you can do about federal student loan rates because Congress sets the rates. Once you finish school, though, you can refinance to private loans to save money during repayment — as long as you aren’t planning on applying for PSLF or depending on for the protections that come with federal loans.

In some cases, taking private student loans is a better choice than starting with federal loans. Carefully consider your situation and weigh the pros and cons to see if you can benefit from a lower rate on a private student loan.

Qualifying for a private student loan or a refinance isn’t always easy, though. You need to have good credit and income. If you can’t get a private loan on your own, you might need a cosigner.

Of course, it’s best if you reduce how much you need to borrow in the first place, said Brewer. “Start with scholarships and see if you qualify for grants,” she said. “Then, look into work-study programs or consider getting a part-time job. The less you end up borrowing, the better off you’ll be financially when you graduate.”

Interested in refinancing student loans?

Here are the top 7 lenders of 2019!
LenderVariable APREligible Degrees 
Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Earnest.

Earnest Disclosures

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 3.45% APR (with Auto Pay) to 7.49% APR (with Auto Pay). Variable rate loan rates range from 2.14% APR (with Auto Pay) to 6.79% 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 September 6, 2019, 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 09/06/2019. 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 hello@earnest.com, or call 888-601-2801 for more information on our student loan refinance product.

© 2018 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.


2 Important Disclosures for SoFi.

SoFi Disclosures

  1. Student loan Refinance: Fixed rates from 3.49% APR to 7.94% APR (with AutoPay). Variable rates from 2.14% APR to 7.84% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.14% APR assumes current 1 month LIBOR rate of 2.14% minus 0.15% margin minus 0.25% ACH discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. See eligibility details. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score. Soft credit inquiries allow SoFi to show you what rates and terms SoFi can offer you up front. After seeing your rates, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit inquiry. Hard credit inquiries (or hard credit pulls) are required for SoFi to be able to issue you a loan. In addition to requiring your explicit permission, these credit pulls may impact your credit score.  
  2. Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)

3 Important Disclosures for Laurel Road.

Laurel Road Disclosures

FIXED APR
Fixed rate options consist of a range from 3.50% per year to 5.55% per year for a 5-year term, 4.00% per year to 6.00% per year for a 7-year term, 4.30% per year to 6.40% per year for a 10-year term, 4.60% per year to 6.80% per year for a 15-year term, or 5.05% per year to 7.02% per year for a 20-year term, with no origination fees. The fixed interest rate will apply until the loan is paid in full (whether before or after default, and whether before or after the scheduled maturity date of the loan). The monthly payment for a sample $10,000 loan at a range of 3.50% per year to 5.55% per year for a 5-year term would be from $184.00 to $193.00. The monthly payment for a sample $10,000 loan at a range of 4.00% per year to 6.00% per year for a 7-year term would be from $138 to $148. The monthly payment for a sample $10,000 loan at a range of 4.30% per year to 6.40% per year for a 10-year term would be from $104 to $115. The monthly payment for a sample $10,000 loan at a range of 4.60% per year to 6.80% per year for a 15-year term would be from $79 to $91. The monthly payment for a sample $10,000 loan at a range of 5.05% per year to 7.02% per year for a 20-year term would be from $68 to $80.

However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the fixed rate will decrease by 0.25%, and will increase back up to the regular fixed interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.

VARIABLE APR
Variable rate options consist of a range from 2.43% per year to 6.05% per year for a 5-year term, 3.75% per year to 6.10% per year for a 7-year term, 4.00% per year to 6.15% per year for a 10-year term, 4.25% per year to 6.40% per year for a 15-year term, or 4.50% per year to 6.65% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.25% to 3.80% for the 5-year term loan, 1.50% to 3.85% for the 7-year term loan, 1.75% to 3.90% for the 10-year term loan, 2.00% to 4.15% for the 15-year term loan, and 2.25% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 2.43% per year to 6.05% per year for a 5-year term would be from $179 to $195. The monthly payment for a sample $10,000 loan at a range of 3.75% per year to 6.10% per year for a 7-year term would be from $137 to $148. The monthly payment for a sample $10,000 loan at a range of 4.00% per year to 6.15% per year for a 10-year term would be from $103 to $114. The monthly payment for a sample $10,000 loan at a range of 4.25% per year to 6.40% per year for a 15-year term would be from $77 to $88. The monthly payment for a sample $10,000 loan at a range of 4.50% per year to 6.65% per year for a 20-year term would be from $65 to $77.

However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.

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.


4 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.


5 Important Disclosures for CommonBond.

CommonBond Disclosures

Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.19% effective August 10, 2019.


6 Important Disclosures for LendKey.

LendKey Disclosures

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.


7 Important Disclosures for College Ave.

College Ave Disclosures

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.

1College Ave Refi Education loans are not currently available to residents of Maine.

2All rates shown include autopay 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.

3$5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees.

4This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.

Information advertised valid as of 08/01/2019. Variable interest rates may increase after consummation.

2.14% – 6.79%1Undergrad
& Graduate

Visit Earnest

2.14% – 7.84%2Undergrad
& Graduate

Visit SoFi

2.43% – 6.65%3Undergrad
& Graduate

Visit Laurel Road

2.43% – 7.60%4Undergrad
& Graduate

Visit Splash

2.14% – 8.01%5Undergrad
& Graduate

Visit CommonBond

2.06% – 8.93%6Undergrad
& Graduate

Visit Lendkey

2.74% – 7.24%7Undergrad
& Graduate

Visit College Ave

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. 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 to help you understand what you are buying. Be sure to consult with 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.

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