Despite being an important part of student loans and repayment, interest rates don’t get mentioned often in the news. However, it’s a very good idea to learn about them and how they affect your student loan repayment.
Interest is money that is owed to a lender in exchange for you getting the loan. It’s calculated as a percentage of the unpaid balance of the loan itself. For example, if you have a loan of $1,000 with a five percent interest rate, then there would be a charge of $50 that is paid to the servicer. This is also why you want to pay as much as you can on a loan. Any money paid beyond the interest amount will go towards the principal.
Federal student loan rates
Federal student loans have interest rates that are set annually by Congress. The rates are fixed for the life of the loan. That means if you receive 4.5% interest rate on a loan you get this year, that’s all the interest that will be charged, even if the rate for newer loans goes up to five percent.
As of July 2015, the interest rate for federal student loans are:
- • Direct subsidized loans for undergraduate students – 4.29%
- • Direct unsubsidized loans for undergraduate students – 4.29%
- • Direct unsubsidized loans for graduate or professional students – 5.84%
- • Direct PLUS loans for families or graduate students – 6.84%
How interest is paid can differ based on the loan. With the subsidized loans, the government will pay the interest while you’re in school and during the grace period. With all of the other federal student loans, the interest is added on as soon as the loan is disbursed, even if the loan itself doesn’t go into repayment until you leave school.
Any unpaid interest does get added to the principal, or unpaid balance, of the loan. To use our earlier example with the $1,000 loan, if you didn’t pay on the principal or interest then it would get added to the $1,000 giving you a total of $1,050 that you owe. And the interest would now cost $52.50. Going in the other direction, if you’d paid the interest plus another $50, then the next month’s interest would be calculated from $950. It would only be $47.50.
With the size and term length of student loans, it can be more complex then what we’ve described here, but you get a basic idea. When you get a student loan, make sure to talk with your financial aid counselor or loan counselor so you can be sure to understand what you’ll need to pay and what the total cost is. It’s part of their job to answer these types of questions, so ask if there is anything you’re not sure about.
Tom Wray is all about the research, getting it right, and making it relevant. He’s got solid journalistic experience in all forms of content delivery – and he’s got his keyboard humming with what’s up and important for students, college admins, parents, employers and news junkies. Check out his weekly column Student Loans 101 and more. Follow him on Twitter at @Tom_Ceannate.