Note that interest charges on federal student loans have been suspended due to the coronavirus outbreak. Check out our Student Loan Hero Coronavirus Information Center for additional news and details.
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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:
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?
- How does student loan interest compound?
- Subsidized vs. unsubsidized federal loans
- Private student loans
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.
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.
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.
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.
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.
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 9 lenders of 2022!
|Lender||Variable APR||Eligible Degrees|
|1.74% – 8.70%1||Undergrad & Graduate|
|1.74% – 7.99%2||Undergrad & Graduate|
|1.74% – 7.99%3||Undergrad & Graduate|
|1.89% – 5.90%4||Undergrad & Graduate|
|1.74% – 7.99%5||Undergrad & Graduate|
|2.05% – 5.25%6||Undergrad & Graduate|
|1.86% – 6.01%||Undergrad |
|N/A7||Undergrad & Graduate|
|1.99% – 8.38%8||Undergrad & Graduate|
|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 May 4, 2022.
2 Rate range above includes optional 0.25% Auto Pay discount. Important Disclosures for Earnest.
Student Loan Refinance Interest Rate Disclosure Actual rate and available repayment terms will vary based on your income. Fixed rates range from 2.99% APR to 8.24% APR (excludes 0.25% Auto Pay discount). Variable rates range from 1.99% APR to 8.24% APR (excludes 0.25% Auto Pay discount). Earnest variable interest rate student loan refinance loans are based on a publicly available index, the 30-day Average Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York. The variable rate is based on the rate published on the 25th day, or the next business day, of the preceding calendar month, rounded to the nearest hundredth of a percent. The rate will not increase more than once per month. The maximum rate for your loan is 8.95% if your loan term is 10 years or less. For loan terms of more than 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%. Please note, we are not able to offer variable rate loans in AK, IL, MN, NH, OH, TN, and TX. Let us know if you have any questions and feel free to reach out directly to our team.
3 Important Disclosures for SoFi.
Fixed rates range from 3.49% APR to 7.99% APR with a 0.25% autopay discount. Variable rates from 1.74% APR to 7.99% APR with a 0.25% autopay discount. Unless required to be lower to comply with applicable law, Variable Interest rates on 5-, 7-, and 10-year terms are capped at 8.95% APR; 15- and 20-year terms are capped at 9.95% APR. Your actual rate will be within the range of rates listed above and will depend on the term you select, evaluation of your creditworthiness, income, presence of a co-signer and a variety of other factors. Lowest rates reserved for the most creditworthy borrowers. For the SoFi variable-rate product, the variable interest rate for a given month is derived by adding a margin to the 30-day average SOFR index, published two business days preceding such calendar month, rounded up to the nearest one hundredth of one percent (0.01% or 0.0001). APRs for variable-rate loans may increase after origination if the SOFR index increases. 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. This benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. The benefit lowers your interest rate but does not change the amount of your monthly payment. This benefit is suspended during periods of deferment and forbearance. Autopay is not required to receive a loan from SoFi.
4 Important Disclosures for Laurel Road.
Laurel Road Disclosures
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.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of April 29, 2021. Information and rates are subject to change without notice.
5 Important Disclosures for Navient.
6 Important Disclosures for LendKey.
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 5/17/2022 student loan refinancing rates range from 2.05% APR – 5.25% Variable APR with AutoPay and 2.49% APR – 7.93% Fixed APR with AutoPay.
7 Important Disclosures for PenFed.
Fixed Rate Loan Terms: 5 years/60 monthly payments, 8 years/96 monthly payments, 12 years/144 monthly payments or 15 years/180 monthly payments. Annual Percentage Rate is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed rates range from 3.29% to 5.43% APR. Rates are subject to change without notice. Fixed APR: Fixed rates will not change during the term. This rate is expressed as an APR. Since there are no fees associated with this loan offer, the APR is the same percentage as the actual interest rate of the loan. 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.
8 Important Disclosures for CitizensBank.
Education Refinance Loan Rate Disclosure: Variable interest rates range from 1.99%-8.38% (1.99%-8.38% APR). Fixed interest rates range from 2.99%-8.63% (2.99%-8.63% APR).
IS Variable Rate Disclosure: Variable Rates advertised are based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of December 1, 2021, the one-month LIBOR rate is 0.09%. Variable interest rates will fluctuate over the term of the loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree and presence of a co-signer. Your final variable rate may be based upon the 30-day average SOFR index, as published by the Federal Reserve Bank of New York. The maximum variable rate is the greater of 21.00% or Prime Rate plus 9.00%.
ERL Variable Rate Disclosure: Variable interest rates are based on the 30-day average Secured Overnight Financing Rate (“SOFR”) index, as published by the Federal Reserve Bank of New York. As of May 1, 2022, the 30-day average SOFR index is 0.29%. Variable interest rates will fluctuate over the term of the loan with changes in the SOFR index, and will vary based on applicable terms, level of degree and presence of a co-signer. The maximum variable interest rate is the greater of 21.00% or the prime rate plus 9.00%.
Fixed Rate Disclosure: Fixed rate ranges are based on applicable terms, level of degree, and presence of a co-signer.
Lowest Rate Disclosure: Lowest rates are only available for the most creditworthy applicants, require a 5-year repayment term, immediate repayment, a graduate or medical degree (where applicable), and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Rates are subject to additional terms and conditions, and are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
Federal Loan vs. Private Loan Benefits: Some federal student loans include unique benefits that the borrower may not receive with a private student loan, some of which we do not offer. Borrowers should carefully review federal benefits, especially if they work in public service, are in the military, are considering possible loan forgiveness options, are currently on or considering income based repayment options or are concerned about a steady source of future income and would want to lower their payments at some time in the future. When the borrower refinances, they waive any current and potential future benefits of their federal loans. For more information about federal student loan benefits and federal loan consolidation, visit http://studentaid.ed.gov/. We also have several resources available to help the borrower make a decision on our website including Should I Refinance My Student Loans? and our FAQs. Should I Refinance My Student Loans? includes a comparison of federal and private student loan benefits that we encourage the borrower to review.