Interest rates on loans come in different versions and sizes. It is important to consider all aspects of loan interest as you are accepting loan terms and signing promissory notes.
There are also fees associated with taking out loans prior to interest accumulation.
Federal Student Loan Rates
Federal Direct Loans1 are student loans with their interest rate set by federal law and regulations.
Student loans come in both subsidized and unsubsidized versions. Subsidized means that the government is subsidizing (paying) the interest while the student is enrolled and often when in a grace period2. They are not interest-free loans but are not accumulating interest during defined periods.
Unsubsidized loans are collecting interest from the point of disbursement. Interest-only payments can be made to reduce compounding, the process of accumulated interest onto the principal of the loan and paying interest-on-interest later.
The interest rate for your loan is determined by the time when it was disbursed -- not when it is in repayment. Therefore, the loan you take out for one academic year may have a different interest rate from the loan you take out the following year.
Effective July 2013
The Bipartisan Student Loan Certainty Act of 2013, passed July 31st and signed into law August 9th, resulted in new legislation that changed student loan interest rates retroactive to July 1, 2013. Under the new law, interest rates that were scheduled to double to a fixed 6.8% were changed to a new rate standard.
Now loan interest rates will be based on the 10-year Treasury bill each June 1 plus an added percentage – an added 2.05% for undergraduate Federal Direct Subsidized and Unsubsidized Loans and an added 3.6% for graduate Federal Direct Unsubsidized Loans. When the economy is strong and government borrowing is more costly, the higher interest is passed onto the student loan borrower as well. Likewise, savings during more sluggish periods also result in lower interest rates for borrowers.
Corresponding rates based on first disbursement date are as follows:
- Subsidized and Unsubsidized Loans for undergraduate students
- July 2016 to June 2017: 3.76%
- July 2015 to June 2016: 4.29%
- July 2014 to June 2015: 4.66%
- July 2013 to June 2014: 3.86%
- Unsubsidized Loans for graduate and professional4
- July 2016 to June 2017: 5.31%
- July 2015 to June 2016: 5.84%
- July 2014 to June 2015: 6.21%
- July 2013 to June 2014: 5.41%
Loans would be “variable-fixed,” meaning students would receive a new rate with each new loan, but then that rate would be fixed for the life of the loan. The law included caps of 8.25% for undergraduate and 9.5% for graduate Federal Direct Sub and Unbsub Loans to prevent loans from exceeding those rates.
Many students also have loans first disbursed beginning July 1, 2006. Rates are as follows for these loans:
- Subsidized Loans for undergraduate students have a fixed interest rate attached to them based on when they were first disbursed.
- July 2006 to June 2008: 6.8%
- July 2008 to June 2009: 6.0%
- July 2009 to June 2010: 5.6%
- July 2010 to June 2011: 4.5%
- July 2011 to June 2013: 3.4%3
- Subsidized Loans for graduate and professional students July 2006 to July 1, 20124: 6.8% fixed rate
- Unsubsidized Loans for all students: 6.8% fixed rate
All student loans taken between July 1998 and June 2006 had a variable interest rate reset each July 1 that cannot exceed 8.25%.
Speak with your lender to know the current interest rate on variable rate loans taken out prior to July 2006.
Federal PLUS Rates
Federal PLUS Loans taken by graduate students or parents of undergraduate, dependent students are more straight forward in their interest accumulation. Like unsubsidized loans, interest begins when the loan is disbursed. Borrowers can elect to make loan payments at that point, interest-only payments, or can request the loan be deferred during the student's enrollment. Note that if full deferment is done, the interest will accumulate and compound onto (be added to) the loan principal.
Effective July 2013
As noted above with Direct student loans, the rates for Federal Graduate and Parent PLUS Loans also changed to a rate based on the 10-year Treasury bill plus an added percentage – an added 4.6% in this case.
PLUS Loan rates based on first disbursement dates are as follows:
- July 2016 to June 2017: 6.31%
- July 2015 to June 2016: 6.84%
- July 2014 to June 2015: 7.21%.
- July 2013 to June 2014: 6.41%.
PLUS Loans will also be “variable-fixed,” where the borrower receives a specific rate with each new loan, but that rate is fixed for the life of the loan. The cap of 10.5% sets the maximum interest rate PLUS Loans could reach.
Beginning July 1, 2010, UC processed PLUS Loans through Direct Lending (DL). PLUS Loans secured from July 2006 through June 2013 in DL had a fixed 7.9% interest rate.
Interest rates on PLUS Loans previously borrowed at UC and first disbursed beginning July 2006 were fixed at 8.5% if the loan is borrowed in the Federal Family Educational Loan (FFEL) program that used a lender.
PLUS Loans (both FFEL and DL) first disbursed July 1998 through June 2006 have a variable rate that reset each July 1 capped at 9.0%. Speak with your lender to know the interest rate on variable rate loans borrowed during this period.
Interest is calculated and accumulates on loans annually (once each year) for federal loans.
Note that non-federal educational loans may have interest calculated and added to the loan quarterly (four times a year). The frequency of this determination can greatly increase the cost of a loan. Obviously, the more often interest is calculated and added to the loan, the more the borrower is paying back in interest-on-interest.
It is advisable, when considering non-federal loans, that families compare the loan to the Federal PLUS Loan option.
Length of the Loan & Repayments
Borrowers should also review the length of the loan. Federal loans offer a standard 10-year repayment. Online loan information can give you an idea of your monthly repayment amounts. Other options can also be exercised when you go into repayment.
Always recognize that the longer the loan repayment, the more you will repay in interest. While a longer loan can present lower monthly repayments, it can also result in a much higher amount to be repaid.
On the flip side, you can reduce your loan costs whenever you have a personal budget surplus. Think about increasing your payment beyond the minimum monthly amount whenever you can. But if you do, contact to servicer to ask to have any excess payment applied to accumulated interest first. This will reduce additional interest being charged on already accumulated interest.
Next, federal loans typically do not have any penalties for early repayment. If you can add to your monthly payment or make multiple payments when you get more financially on your feet, you can pay off the loan in a shorter period of time and reduce interest accumulation.
- FEDERAL STAFFORD LOANS: With loan program changes as of July 2010, the Federal Stafford Loan where students selected a lender came to an end and was replaced with the Federal Direct Loan Program. Stafford Loans made at UC prior to July 1, 2010, carry the same federal interest rate structure described above regardless of the lender the student selected when that program was in place. However, lenders may have offered small savings through borrower benefits when a student is in repayment.
- GRACE PERIOD: The grace period is the time between no longer attending school and beginning repayment. Action by Congress eliminated interest subsidy during the 6-month grace period for new Federal Direct Subsidized Loans made on or after July 1, 2012, and before July 1, 2014. The repayment period still begins 6 months after the student is no longer enrolled at least half-time, but interest that accrues during those 6 months will be payable by the student rather than be subsidized by the federal government on those loans.
- NEW 150% LOAN RULE: In retaining the Federal Direct Subsidized Loan interest rate at 3.4% temporarily for the 2012-13 academic year, other permanent provisions of the law paid for the one-year extension. Beginning July 1, 2013, all new loan borrowers (students who are brand new or students who have paid off any past accumulated loan debt) will not be eligible to borrow additional subsidized loans if they have exceeded 150% of their academic program (i.e., borrow subsidized loans for more than 3 years in a 2-year program or 6 years in a 4-year program), and any previous subsidized loans held by the student will lose the in-school interest subsidy. Students borrowing for the first time as of July 1, 2013, should be particularly planful so as to reach their educational goals in a timely manner.
- GRAD STUDENT SUBSIDIZED LOANS: Graduate and professional students are no longer eligible for Subsidized Loans as of July 1, 2012.