Learn About Student Loan Interest Rates

Student Loan Interest Rates Can Make a Difference In the Amount of Money Owed

As with any type of loan, it is important to learn about interest rates before borrowing money through federal or private student loans. The different types of interest rates can have an impact on the amount of money owed and your ability to make payments. Here are some student loan interest rate terms you need to know to make the best choices for your individual financial situation.

Subsidized and Unsubsidized Student Loans

These terms apply to federal student loans made through the Federal Direct Loan Program. Direct Subsidized Loans are made to eligible undergraduate students who demonstrate financial need. Because they are subsidized, the U.S. Department of Education pays interest on them while you’re in school at least half-time, and during any deferment periods, resulting in slightly better terms for you. Direct Unsubsidized Loans are made to eligible undergraduate, graduate, and professional students, but the student does not have to demonstrate financial need. Because these loans are not subsidized, the borrower is responsible for paying interest on them during all periods.

Fixed and Variable Interest Rates

Interest is additional money you will pay to your student loan lender in addition to repaying the original amount of the loan. Interest rates are fixed with federal student loans, meaning they will not change during the course of your loan.

For loans first disbursed on or after 7/1/14 and before 7/1/15, the interest rate for undergraduate subsidized and unsubsidized loans is 4.66%; the graduate and professional rate is 6.21%, and the PLUS Loan rate is 7.21%. With private student loans, interest rates may be fixed or variable. If the interest rate is variable, it can change during the course of your loan.

Some lenders might try to attract your attention with lower initial interest rates, but these could increase dramatically.

Interest Accrual

With Direct Unsubsidized Loans and private student loans your interest will accumulate, or accrue, from the time you are in school until the loan is repaid. With Direct Subsidized Loans, interest begins accruing after you graduate. For fixed interest rates, the amount you will pay in interest can be calculated by multiplying your loan balance by the number of days since the last payment times the interest rate factor. The interest rate factor is determined by dividing your loan’s interest rate (4.66%, 6.21%, or 7.21%) by the number of days in the year (365 or 366). For private student loans, you need to talk to the lender to determine how interest is accrued.

Interest Deferral

Under certain circumstances, you can receive a deferment or forbearance that allows you to temporarily postpone or reduce your federal student loan payments. A deferment is a period during which you can temporarily delay repayment of the principal and interest of your loan. If you can't make scheduled loan payments, but don't qualify for a deferment, your loan servicer may be able to qualify you for forbearance.

This may allow you to stop making payments or reduce your monthly payment for up to 12 months. Interest will continue to accrue on your subsidized and unsubsidized loans. Deferment and forbearance opportunities may vary with private student loan lenders, so always ask questions before signing.