08 May How Does Student Loan Interest Work?

College graduation season is here! Fresh graduates are heading out in the world to begin their careers and lives as adults. With all of that new freedom, responsibilities also begin kicking in… including repaying their student loans. At the same time, high school seniors are making decisions about which aid to accept. Perhaps the most important thing to consider when deciding which loans to accept is the student loan interest rate. Students (and families) should compare federal student loans and private student loans. It’s important to understand the lingo and the rates you’re looking at. Here’s a few tips to understand student loan interest rates. 

Fixed vs. Variable Interest 

Fixed Interest Rates:

These interest rates remain the same throughout the life of your student loan. This usually allows you to determine exactly how much you will be paying each month. The only  exception, however, is that the payment might change if you qualify for deferment, forbearance, or an interest rate reduction benefit. 

Variable Interest Rates:

Variable  interest rates are usually tied to some type of index, such as the Prime Index or the London Interbank Offered Rate (LIBOR) Index. This means they fluctuate  as the chosen index changes. This means your monthly payment can change based on interest rate fluctuations, and also if you qualify for deferment, forbearance, or an interest rate reduction.

When you compare federal and private student loans, look at the Annual Percentage Rate (APR) to make a fair comparison because it includes interest, fees, and other charges, and also takes into consideration whether payments have been deferred. The APR may actually be higher or lower than the stated interest rate. 

Interest Accrual 

It’s incredibly important to understand when interest starts accruing, or adding up, on your student loans. In most cases, interest is deferred while you’re in school and doesn’t start building until graduation. Some loans may start accruing interest while you are still in school, even though you are not yet making payments. Oftentimes, recent graduates will likely be entitled to a grace period of six months before they need to make any payments. However, interest may still accrue during this time. If your budget allows, it might make sense to start repaying your student loans as soon as possible to reduce the interest you’re paying on. 

What About Student Loans for 2023-2024?

The federal government usually sets the interest rate on federal student loans on July 1.  The Department of Education reported the following interest rates on student loans for the upcoming academic year:

• 5.50% – Federal Direct Stafford Loan (Subsidized and Unsubsidized) for undergraduate students
• 7.05% – Federal Direct Unsubsidized Stafford Loan for graduate or professional students
• 8.05% – Federal Direct PLUS Loan for parents and graduate or professional students.

If you need help understanding your federal and private college student loans, or would like more information on the college financial aid process, contact College Financial Aid Advisors (CFAA). We’re here to help you make sense of all of this information! 

Who We Are

CFAA helps with the financial aid process, from completing the FAFSA and completing the CSS Profile to reviewing the SAR, responding to requests for verification, comparing financial aid offers and understanding student loan options. Schedule a CFAA 15 Minute Power Chat to learn more about finding ways to pay for college. To get the latest financial aid information and college application to-do lists, look for my bi-weekly JustAskJodi emails and check out my monthly CFAA e-newsletter.

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