Imagine you’re shopping around for student loans. You can’t seem to make a final decision on which to get because the interest rates are confusing. Understandably, you have a lot of questions. What are they? How does it affect your payments? And most importantly, what’s a good interest rate? Let’s go over it.
What Is Student Loan Interest?
Student loan interest is the amount of money that you pay for borrowing the loan. This interest is how lenders make a profit from giving you their money.
Does Student Loan Interest Accrue Monthly Or Daily?
It depends on the type of loan you get.
When in repayment, federal student loans accrue interest daily, whether they’re unsubsidized or subsidized. This means that they use the simple daily interest formula. How does this work? Let’s look at an example. You have a loan for $15,000 with a 6% interest rate. To figure out the daily interest, divide the interest rate by 365 and multiply it by your principal. In this case,
6% / 365 = .016%
.016% * 15000 = $2.4
So, your federal student loan will be accumulating $2.40 daily in interest.
It is important to note that this is different from compounding interest daily. If your loan was compounding daily, you’d be paying interest on the interest you accrued the day before. In this example, the interest is calculated based off of the initial principal amount of $15,000, so it’s accruing interest daily.
Interest that compounds daily would mean that on the first day the interest would be calculated based off of the $15,000. Then, on the second day, the interest would be based off of that same amount plus any interest you accrued the previous day, so $15,002.40.
Generally, your interest will accrue daily but not compound daily. Typically it’ll compound based on your payment period. For example, if you pay every 30 days, you’d have accumulated $72 in interest, so the interest will start accumulating based off of $15,072 instead of $15,000.
Similarly, private student loans accrue interest daily but they can also accrue interest monthly. It really just depends on the lender, so be sure to check with them for details on that.
What Are the Current Interest Rates?
The current federal interest rates are:
- 3.73% for Direct Subsidized and Direct Unsubsidized Loans for undergraduate students
- 5.28% for Unsubsidized Loans for graduate or professional students
- 6.28% for Direct PLUS loans for parents, graduate or professional students
These federal rates are actually at an all-time low and apply to any student loans disbursed between July 1, 2021, and July 1, 2022.
Where federal student loans are usually fixed and have a predetermined rate, private student loans tend to vary by lender. They are dependent on factors like your creditworthiness, your finances, and whether you have a cosigner. The rates typically range anywhere from 1% to 13% and can be either fixed or variable.
What Is the Impact of Interest Rate on Student Loans?
The most pressing matter would be the impact on your monthly payments. In that case, any interest accrued that month will be part of the payment that you’ll have to make, so it can make the payment higher. Additionally, know that your payments will pay off the interest first. Then, any money left over will be put toward the principal. As time goes on and you make your payments, there will be less interest and you’ll start to see your principal go down.
Of course, since you have to pay for interest as well, you will pay back more than you borrowed over the life of the loan. Usually, the higher the interest rate and the longer the length of the loan, the more money you’ll end up paying back. The opposite is also true. For example,
- With a $15,000 loan at 6.03% over the course of 20 years, you’ll actually end up paying $25,852.80
- With the same $15,000 loan at 6.03% but over the course of 10 years, you’ll pay $20,011.20
- With the same $15,000 loan but now at 5.14% over the course of 10 years, you’ll pay $19,215.60
What Is A Good Interest Rate?
Because interest rates vary depending on different factors, there is no one perfect interest rate to base all of your options on. For the most part, though, any interest rate below 7% is considered good and any over 10% is high.
If you’d like to learn more about interest rates, check out this article.
Final Thoughts from the Nest
Interest rates depend on the type of loan you get, whether it’s federal or private, and your personal finances. This means that the interest rate that’s perfect for your friend may not be the best fit for your situation. Keep this in mind when looking around for loans. Be sure to exhaust your options on federal student loans first though. If you still need more money, use Sparrow to help you search for private loans. To get started, simply create an account.