Student Loan Interest Rates and How They Work

Remember when you signed on the dotted lines, agreeing to all the terms and conditions of your student loans? How well did you understand them? If you’re anything like the average student just trying to settle their affairs to start classes, you probably didn’t read the fine print and ask serious, poignant questions to your financial aid advisor.

You probably read the term “interest rate” and maybe even heard about it in passing, but what is it exactly? And how high are student loan interest rates? How do they work? Let’s find out so that you can be prepared to repay your student loans with those interest rates factored in.

Terms To Know

Before we proceed, you should know key terms related to student loan interest rates.

  • The amount borrowed: Total amount borrowed per loan.
  • Disbursement date: The date your funds arrive, which is when interest begins accruing
  • Interest rate: The amount you must pay to borrow these funds
  • Interest accruement: This can happen as a monthly or daily charge
  • How interest capitalizes: Accrued interest gets added to your principal balance
  • Payment schedule: How many payments must you make
  • First payment date: The date of your very first payment

How does Student Loan Interest Work?

Whenever new student loans are issued to a borrower (like yourself), that borrower must sign a promissory note. This note details the terms of the loan taken out. You – the borrower – must read every part of this statement, as it tells you how much you owe and when you need to make your payments. It also applies to parent PLUS loans and the interest on them.

You won’t be required to make payments while still enrolled in school. However, if you have graduated but can demonstrate financial difficulties, you might qualify for a deferment or income-driven repayment plan.

The Average Interest Rate

According to Lantern by SoFi, the average interest rate on student loans is 5.8%. But, of course, how much you are paying on your loan depends on which type of loan you have.

The government establishes interest rates for federal loans – both subsidized and unsubsidized. For the 2021-2022 school year, the government set the interest rate at 3.73% for undergraduates. However, the direct unsubsidized loan rate for graduate or professional students was 5.28%.

Private loans vary based on the lender’s terms. For example, you might get a 1.86% APR interest rate if you have a high credit score. However, the APR could be higher if your credit score is lower.

Factors Affecting Student Loan Interest

There are a few factors that impact student loan interest rates. First, due to the COVID-19 pandemic, the US government temporarily stopped federal student loan payments in 2020. The Department of Education extended this pause from August 31, 2022, to April 6, 2022.

This emergency relief method includes:

  • 0% interest rate
  • Suspension of payments
  • Ceased collections on defaulted loans

Interest will resume when federal loan payments do.

Refinancing Your Loan

It is possible to refinance your student loan. It can give you more favorable terms and a lower interest rate. You should compare terms as you examine your options. Just be sure you have a strong enough credit score to qualify. But, if you do refinance, you will no longer qualify for pause-on-payment programs and federal student loan debt forgiveness.

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