What Are Student Loan Interest Rates?
When borrowing money to pay for college, lenders need something in return to make the deal beneficial for both parties. That’s where interest rates come in — your lender will charge an annual fee as a percentage of the amount you borrow. Interest charges are added to the principal balance and paid monthly.
The annual percentage rate (APR) on your loan will depend on a few factors and can even change over time, depending on what type of loan you have. Right now, it’s typical to pay a student loan interest rate of around 3%-6%.
How Student Loan Rates Are Determined
Federal student loan interest rates are set by the government and are tied closely to the 10 Year Treasury note, plus an additional percentage, according to U.S. News. Loan servicers are not able to set their own rates on federal student loans, and most loans have a fixed rate through the entire term (though some student loans offer a variable interest rate that can change yearly). New interest rates on student loans are set each spring before the new school year.
Private lenders, on the other hand, are able to determine their own student loan rates. Although base interest rates are set according to similar factors as federal student loans, private lenders also heavily consider your credit history when determining what you will pay. Private student loan rates can be fixed or variable.
How Student Loan Interest Rates Are Applied
Your student loan interest starts accruing the day you take out your loan. If you took out federal subsidized loans as a college student, the federal government paid your interest while you were in school and during your 6 month grace period. You become responsible for making payments toward the principal and interest the first day after your grace period ends.
If you took out unsubsidized or private loans as a college student, you accrued interest throughout your four years of college. It’s important to note that you must pay off any late fees and accrued interest first before any of your payments will be applied to your principle balance.
How Student Loan Interest Is Calculated
It’s important to know how to calculate the amount of interest your student loan debt accrues every day. Usually, this information makes borrowers extremely motivated to pay back their student loans quickly!
The formula works like this: