Guide to Student Loan Interest Rates and How Much You’ll Pay.

Like any other type of loan, federal student loans may have to be repaid with interest. Federal student loans have fixed interest rates, which means they stay the same for the life of the loan, but the interest rates given to newly created student loans change from year to year.

With that in mind, here is a guide to current student loan interest rates, how these and future student loan interest rates are determined, and how they are used to calculate the amount of interest. that you will actually pay.

Interest rate for the 2018-2019 school year

Here is the short answer. Federal student loans disbursed during the 2018-2019 school year have the following fixed interest rates:

• 5.05% for undergraduate student loans (unsubsidized and subsidized have the same rate)

• 6.60% for graduate and professional student loans

• 7.60% for PLUS loans granted to parents and graduate students

However, there is more to the story. In the sections to come, we’ll see how these interest rates are determined, how they’re used to calculate your interest, and other major Federal Student Loan expenses you should know about.

How are Federal Student Loan Interest Rates Determined?

As mentioned, the interest rates in the previous section only apply to the 2018-2019 school year. More specifically, this means that they are the interest rates on direct loans disbursed for the first time as of July 1, 2018 and before July 1, 2019. Any direct loan disbursed for the first time after July 1 2019 will be considered as part of the 2019 financial year – 2020 school year.

Prior to the 2013-2014 school year, federal student loan interest rates were set by Congress, and although they generally reflect market interest rate terms, there was no specific formula. .

Now, federal student loan interest rates are determined by the high yield on 10-year U.S. Treasuries at the last auction before June 1 of each year. A certain percentage is added to this, depending on the type of loan, and the total of these two percentages becomes the federal student loan interest rate for the upcoming school year.

Because they are tied to the spring interest rate on 10-year treasury bills, the interest rates on federal student loans disbursed in the next school year are usually announced in May.

It’s also important to mention that there is an upper limit to federal interest rates for students. Regardless of the benchmark yield on 10-year treasury bills, the maximum interest rates on federal student loans are set at 8.25% for undergraduate loans, 9.5% for student loans. graduates and 10.5% for loans to parents.

If you want to know the federal student loan interest rates before the 2018-2019 school year, the Department of Education maintains a list of historical interest rates on its website.

In contrast, the interest rates for private student loans are governed only by the companies that grant loans and the borrower’s credit qualifications.

How is the interest on your student loan calculated

Your interest rate is used to calculate the interest on your student loan that you pay on each monthly payment. It is a very common misconception that you pay the same amount of interest on each of your payments, and it is not necessarily true even if your principal balance remains the same.

Here is how it works. First, the interest rate on your student loan is divided by the number of days in the year to determine your interest rate factor. For example, if your interest rate is 5.05% and there are 365 days in the current year, your interest rate factor is 0.0138%.

Then your outstanding principal balance is multiplied by this factor, then multiplied again by the number of days since your last payment.

So if you owe $ 10,000 on student loans with an interest rate of 5.05% and 30 days have passed since your last payment, the formula says your accrued interest is $ 41.40.

Subsidized vs. Unsubsidized: How Interest Works

An important distinction is how the interest on student loans differs between subsidized and unsubsidized loans.

First, although subsidized loans were previously available to graduate students, they are now only available to undergraduate borrowers. And since the new rules on interest rates came into effect in 2013, subsidized and non-subsidized loans have exactly the same interest rates.

The difference is what happens to the interest that accrues during certain periods. Specifically, any interest that accumulates on your subsidized student loans while you are in school, during the six-month grace period after leaving school, and during periods when your loan is deferred.

In other words, if you have a $ 5,000 subsidized student loan and, according to the calculation method discussed earlier, $ 100 of interest has accrued while you are in school, your loan balance will still be 5,000. $. The government will take care of the interest payments.

However, accrued interest on unsubsidized loans is always your responsibility. To be clear, you won’t have to pay off your federal student loans while you are in school, but unless they are subsidized, interest does accrue.

What if your interest is more than your monthly payment?

There are several possible situations where your required monthly payment on your student loans will not be enough to cover the accrued interest.

For example, I already mentioned that interest accrues on unsubsidized loans while you are in school. In this case, your required monthly payment is $ 0, but your interest charges due to accrued interest are not. Another situation is if you have an income-based repayment plan and your required monthly payment is less than the amount of interest that accumulates between payments.

In situations like these, there are a few rules to know:

• At the end of a deferral period, or your six month grace period, any unpaid interest accrued on your unsubsidized loans is usually capitalized, that is, it is added to the balance of your loan. your capital. This is also true for any unpaid interest if you leave an income-based repayment plan.

• As long as you remain in an income-based repayment plan and are entitled to a reduced payment based on your income, your unpaid interest will not (yet) be capitalized. However, on unsubsidized loans, it will continue to accumulate but will not be part of the principal balance.

• Finally, accrued unpaid interest on subsidized loans is generally covered by the government.

Don’t forget the loan fees

Finally, it’s important to mention that interest isn’t the only expense associated with federal student loans. You will also have to pay a “loan fee,” which is an origination fee that is deducted from your student loans when they are disbursed.

For example, let’s say you are a graduate student and you get an unsubsidized direct loan of $ 10,000, which was first disbursed in August 2018. The 1.066% fee would be deducted from your loan proceeds, so a total of $ 9,893.40 would be disbursed. at your school on your behalf.

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