There are serious costs involved in studying in the United States. Students who prefer to get a higher degree need to be aware of those expenses and act accordingly. Most of those students see student loans as an aid for studying. However, some of them are not aware of the consequences that loans can create and terms that are associated with this aid. For instance, the student loan interest rate is one of those terms that need to be clearly understood by students before they apply for loans. Otherwise, it can backfire on them with additional charges.
So, what is the student loan interest rate?
As we mentioned, students who consider taking a loan need to be fully aware and educated about interest rates. An interest rate is the percentage of the borrowed amount that a student has to pay extra on top of the full amount. Various aspects can trigger interest rates to fluctuate. Some of those aspects are the market itself, the purpose of the student for applying, or the lender’s personal choice. Just like your monthly loan payment, interest rates are also paid annually by students.
There are various forms of interest rates. Some of them are created right away as soon as the student takes the loan, while others can start from the time when a student graduates. To put it simply, lower interest rates are good for a student’s future while higher interest rates can damage their bankroll even if they get a stable income in the future.
Student Loan Interest Rate Basics
Interest rates can be charged annually, monthly, or quarterly. Although it can be charged quite frequently, we can express this matter as an annual percentage rate too. Besides this, students may get charged for loan fee, which is another broad topic. That is why we will talk about it in other blog posts. So, stay tuned for more information. There are various public programs that students can get enrolled in with lower interest rates.
The first program is HPSL (Health Professions Student Loans). For all the graduate or undergraduate students who have a financial need, this program offers fixed low interest student loans. There are various branches of healthcare that you can apply with this loan. Such as:
- Osteopathic medicine
- Veterinary Medicine
- Allopathic Medicine
If you follow this path, you will not pay any student loan interest rate until you graduate.
NSL (Nursing Student Loans)
For those students who have exceptional financial need and want to enrol in nursing schools, this is a great program that offers low-interest fixed-rate loans. Nurse Corps Student Loan program is available for those students who lack financial support and want to study nursing in the United States and its territories. Following programs are available for that student who is eligible for this loan.
During the deferment, grace, or studying period, students are free of charge regarding the loan interest rates.
Variable Interest Rate vs Fixed Interest Rates
Interest rates for a student loan can be both variable and fixed. A fixed student loan interest rate refers to the condition in which amount will not change over time, and external factors cannot affect it. On the other hand, a variable interest rate means that it can change periodically over the payment period. The changes may be due to the overall economic condition or any other reason. Various indexes are used with student loans, and for a vast majority of people, student loans can be expressed as the sum of those aspects too. Most frequently used indexes with student loans include:
- T-Bill Rate
- Ten Year Treasury Rate
- Prime Lending Rate and so on
How can Interest rates impact student loan payments?
We can say that the student loan interest rate is the cost of the loan. The good news about this cost is that the outstanding balance principle allows students to reduce the bill over time as they pay some portion of the borrowed money back. There are various ways that interest rates can affect the total loan payment. For federal loans, the interest rates applied through the daily interest formula.
On the other hand, for private loans, rates might be applied through compounding interest and daily interest formula. Since the previous payment amount, the remaining portion comes with a new interest rate. That is how the relationship between these two matters is crucial. For instance, if you make payments regularly without missing deadlines, your interest rate for the loan will decrease as well as the whole loan amount. The total monthly payment amount would not change because of the interest rate. Though paying less money for interest will feel like a relief to some degree for students.
Capitalized Interest Rates
Capitalization of the interest rate amount is one of those essential aspects that students need to be aware of. In case if the interest is unpaid in times of forbearance or deferment, it can be capitalized as soon as the student loan changes its status to repayment. Capitalization of the interest rate will add the amount to the whole loan balance, which will create an outstanding principal balance. Capitalization may help you or put you in an even more difficult situation because in that case, the interest rate will be calculated for the whole amount. If a student has lesser unpaid loans after forbearance or deferment period, it is advisable to take a chance on capitalization. For private student loans, capitalization may be the case even more frequently if we compare the conditions of both private and public loans.
Negative Amortization of the Interest Rate
It is the case that happens when the amount of interest rate exceeds the overall loan amount. In that case, the loan is considered to be negatively amortized. When it can happen and how to avoid this situation? It is rarely a case for most students, but amortization can occur. If you are on an income-driven repayment plan, forbearance or deferment, this can happen to you. Do not worry because right now there are no penalties for such cases whether you own a private or public student loan. Borrowers can freely get back on track to pay the new interest rates after the conditions mentioned above.
Unsubsidized and Subsidized Student Loan Interest Rate
The loans can be both subsidized and unsubsidized. For the first case, there is an advantage for students. If students in authorized deferment or forbearance, during the period, the Federal government pays the portion of the loan interest rate. For instance, Direct Subsidized Loan or Perkins Loan can be good examples for this matter. Unlike the first one, unsubsidized student loans do not offer this advantage. As the amount of debt from interest rates will be added to a student’s balance as soon as their account status turns to repayment after forbearance or authorized deferment.
Student Loan Discounts
To encourage a borrower, it is frequently happening that lenders provide them with discounts. For those segments of students who would like to get the loan with auto-debit, the most common discount method is the usage of interest rate reduction. The interest rate can be reduced as much as 0.25 per cent for those of you who use the auto-debit. The discounts on the student loan interest rate for private loans vary from 0.25 per cent to 0.50 per cent.
On the federal income tax return, that amount would show itself as a total of $2500 for students. The deduction can happen when accidentally a student gets unable to pay the amount in any possible way. It can be applied to both interest rate and the student loan debt as well.
What are the impacts of Student Loan Fees?
Origination fees which are known as loan disbursement fees too are effective solution forms of up-front fees that students need to pay. Let’s give an example to make you better understand the process. Imagine that you have a ten-year repayment term on the student loan and four per cent of the origination fee. That factor will be equivalent to a 7/8 to 1 per cent increase in your annual interest rate. For 30 year loans, the four per cent fee will increase the overall interest rate as much as 1/3 per cent. The impact of the origination fees can be drastic for short period loans. So, be careful about up-front fees and check with your lender if the loan has those or not before committing. Otherwise, you would be left with a higher interest rate and high loan debt as a result of those fees.
How changes in the interest rates affect your loan payment plan?
Increasing the student loan interest rates can lead to serious consequences for students. If the rate is increased by only one per cent, it will indeed increase the
- Ten-year term loan – by five per cent
- 20-year term loans- by nine per cent
- And 30-year term loans by twelve per cent
If you think that it is not that much, think twice after reading the next example. Imagine that you have a student loan worth 10.000 dollars, and the interest rate of the loan increased by one per cent. For your monthly payment, if you paid 106 dollars annually, you will need to pay at least 111 dollars following the next month after the interest rate increase. The amount may seem small, but that is an example of only one per cent increase. Imagine that the rise was like four or five per cent and your debt amount was higher than $10.000. The consequences would be a lot different, and it would put a student into a harsh situation that she/he needs to deal with for the next few decades.
How can you choose the lowest cost student loan?
In general, students who would like to have the lowest cost loans need to select the student loan that has no-fee equivalent loan interest rate. There are other terms that you need to consider before doing so. Such as
- Availability of student loan cancellation
- Student loan discharge
- Loan Forgiveness
- And alternate loan repayment terms.
Federal student loans are more affordable because of their availability, cost, lower interest rates, and other benefits. Though, you need to keep in mind that, whether or not your loan is from the federal government or private lender, the variability of the loan may affect your personal condition. The variable student loan interest rate can add up more debt to your account because, in a rising interest rate environment, there is almost no way of stopping that.
Current Loan Interest Rates
In the 2019-2020 academic year, the IR for undergraduate students is 4.53 per cent. For graduate ones, the percentage is 6.08 for unsubsidized and 7.08 for parent loans. For private loans, the case is a little bit confusing. The rates may be lower than federal loans, but that is not always the case. You need to look at your personal case for assuming these numbers. Therefore, students who have a higher credit score can get student loans with lower interest rates and vice versa. If a student has a substantial credit score, he/she needs to apply for student loan consolidation and consolidate your private loans into one loan with a lower interest rate.
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Current Rates Chart
Private Student Loans
Fixed: 4 to 14.92 %
Variable: 1.79 to 13.92 %
Fixed: 3.22 to 8.99 %
Variable: 1.57 to 13.92 %
Student Loan Interest Rate Federal
Fixed Undergraduate: 4.54 %
Fixed Graduate: 6.08 %
PLUS: 7.07 %
The average for student loan interest rate is 5.8 per cent among all students who borrowed the loan till now, according to research that is conducted by Credible. The calculation included both private and federal student loans. That means, with the 5.8 per cent interest rate the student who borrowed 30.000 dollars from lenders will pay around 9600 dollars over the next ten years of the loan term. So, as you can see, this measure is very important. For those of you who have multiple student loans from various lenders, the interest rate would be different because this measure is assigned specifically for the loan. By using the student loan interest rate calculator, you can easily find out that number.
How do the Interest Rates work?
As you probably know, interest rates for student loans are working differently, and several aspects affect that measure. For private or public loans, the procedure is different. For public loans, depending on the economic condition, every candidate for student loans will get the same interest rate according to the amount that they decide to borrow. But for private loans, it is more complicated as some other aspects such as student’s credit scores play a huge role in determining the interest rate. That means, students with higher credit scores have the chance to get a better deal rather than the ones that have lower credit scores.
Student Loan Interest rate for federal ones is decided by congress. The amount can change according to the outstanding balance of the borrower. For the life of the loan all the federal loans, the rates will stay fixed. On the other hand, for private loans, the majority of the rates depend on the credit scores. Most of the time, the origination fees are not the case. Unlike federal loans, borrowers have the choice of whether or not they want to take the fixed or variable interest rates. Variable rates than those students choose to have on their loans can change monthly or annually.
The calculation process of the interest rates
I know most of the students want to figure out how they are charged with those percentages and how to calculate it. By following the steps that we are going to mention, you will be capable of doing that by yourself without any tool.
Step one is about calculating the daily interest rate for your loan. To do that, you should divide your annual interest rate by 365 to see how it turns out on a daily basis.
For instance, imagine that you have 10.000 dollars’ worth loan with five per cent of the interest rate. In that case, your daily interest rate would be 365(0.05/365), which is equal to 0.000137. After finding out the daily interest rate number, you should multiply that with the whole loan amount in order to see how much you should pay for the interest rate daily. 10.000(0.000137 x 10.000) + 1.37 dollars.
The second and last step that you should take is to multiply the daily amount with the number of days in a given calendar month. Which is 30 x 1.37 = 41.10 dollars. If you would like to see the amount on a yearly basis, all you need to do is multiplying the monthly amount with 12. In this example, the student loan interest rate would be 41.10 x 12 = 493.2 dollars.