Beware of Student Loan Interest Rates, or You’ll Pay For It

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For many students, attending the college of their choice may require a student loan (or several) if their family cannot afford to pay out of pocket. But getting approved for a $7,000 loan does not mean you will only pay back $7,000.

It’s important to understand how student loan interest works to get a better handle on just how much money you’ll be on the hook for after graduation. Here are three questions to get to the bottom of student loan interest rates:

How does student loan interest work?
How much do you pay back on student loans?
How can you find the best student loan interest rates?

How does student loan interest work?

When you borrow money from a bank or other financial institution, you’re using their money to fund something you want. For the privilege of using their funds, lenders will then charge you interest.

Student loan interest is no different. While interest rates are commonly lower on student loans than on credit cards or other unsecured debt, they are rarely 0%. That means if you borrow $10,000 for school, unless you’re able to pay it back in full the same day, you will end up paying back more than $10,000.

This is worth exploring further, so let’s dive into some of the details, such as:

How is student loan interest calculated?

Student loan interest rates are expressed as an annual percentage rate. Federal rates are set by Congress each year. Because federal loans are set by the government, the rate you get will not change based on your personal financial circumstances. The amount you get, however, can be influenced by the household income reported on your Free Application for Federal Student Aid, or FAFSA.

Private student loan rates, however, are set by lenders based on financial market rates, typically with the London Interbank Offered Rate (LIBOR), a benchmark interest rate used as a reference for many types of loans.

The rate you get with a private student loan, also depends on a variety of factors, including your credit history, credit score and income. Lenders have their own models for calculating risk, so the rate you get can vary from lender to lender.

How does student loan interest compound?

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. With these loans, you are responsible for all of the interest that accrues from the time the loan is disbursed. Therefore, if you took out an unsubsidized loan as a freshman in college, by the time you graduate that loan has accrued roughly four years of interest that you will be responsible for paying back.

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

The chart assumes that the current 4.53% 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 $2,900 in interest. When you graduate, you actually owe $29,900. And, of course, the interest keeps piling up during your grace period. When you finally start repaying your loans, you could be looking at more than $30,000 in debt — even though you didn’t borrow that much from the start.

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

Private student loans

You see a similar story with private student loans. 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 — as these perks are not guaranteed. But either way, you’ll still have to watch rates, and realize your balance could grow while you’re getting your education.

Additionally, some private loans have a variable interest rate, meaning it can drop or rise based on economic factors. This can impact both your monthly payments and the total cost of the loan over time.

No matter what type of loan you get, it’s not a bad idea to at least try paying the interest while you’re in school. Those payments would often be much smaller than a regular loan payment and can potentially save you thousands of dollars in the long run.

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 loan 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 $55,280, which is the average starting salary for the class of 2019, according to the National Association of Colleges and Employers.)

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.


The Department of Education

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 20 years.

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.

How can you find 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 loans. However, you can reduce what you end up paying by looking for the best student loan rates.

While you can’t get a better rate on federal student loans because Congress sets them, these loans do come with certain federal perks and protections, like economic hardship protection, flexible repayment options or loan forgiveness. that may benefit you in the long run.

Still, for some borrowers, taking out private student loans could be a better choice than borrowing 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, the best way to avoid a shocking amount of debt after graduation is to minimize the amount you take out in loans in the first place. Exhaust all your resources for finding scholarships, grants and other ways to pay for school before you consider a federal or private loan.

College is incredibly expensive, which is why so many students need loans in the first place. But doing your homework and understanding the loan process can ultimately help you save money in the long run.

Kamaron McNair contributed to this report.

Interested in refinancing student loans?

Here are the top 6 lenders of 2021!
LenderVariable APREligible Degrees 
1.89% – 5.99%1Undergrad
& Graduate

Visit Splash

1.99% – 5.64%2Undergrad
& Graduate

Visit Earnest

1.99% – 6.84%3Undergrad
& Graduate

Visit CommonBond

1.91% – 5.25%4Undergrad
& Graduate

Visit Lendkey

2.25% – 6.53%5Undergrad
& Graduate

Visit SoFi

2.17% – 4.47%6Undergrad
& Graduate

Visit PenFed

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 Feburary 1, 2021.


2 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 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.


3 Important Disclosures for CommonBond.

CommonBond Disclosures

Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. 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 0.15% effective Jan 1, 2021 and may increase after consummation.


4 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.

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 02/17/2021 student loan refinancing rates range from 1.91% APR – 5.25% Variable APR with AutoPay and 2.95% APR – 7.63% Fixed APR with AutoPay.


5 Important Disclosures for SoFi.

SoFi Disclosures

  1. Student loan Refinance: 1. Fixed rates from 2.99% APR to 6.99% APR (with AutoPay). Variable rates from 2.25% APR to 6.53% 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 2.25% APR assumes current 1 month LIBOR rate of 0.12% plus 2.38% 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. The discount will not reduce the monthly payment; instead, the interest savings are applied to the principal loan balance, which may help pay the loan down faster. Enrolling in autopay is not required to receive a loan from SoFi. *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.Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.

6 Important Disclosures for PenFed.

PenFed Disclosures

Annual Percentage Rate (APR) is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rates range from 2.99%-5.15% APR and Variable Rates range from 2.17%-4.47% APR. Both Fixed and Variable Rates will vary based on application terms, level of degree and presence of a co-signer. These rates are subject to additional terms and conditions and rates are subject to change at any time without notice. For Variable Rate student loans, the rate will never exceed 9.00% for 5 year and 8 year loans and 10.00% for 12 and 15 years loans (the maximum allowable for this loan). Minimum variable rate will be 2.00%. These rates are subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.