When the interest rate and annual percentage rate (APR) are calculated for a loan — especially a large one — the two can produce very different numbers, so it’s important to know the difference when evaluating what a loan will cost you.
Basically, the interest rate is the cost of borrowing money, and the APR is the total cost, including lender fees and any other charges.
Let’s look at interest rates vs. APRs for loans, and student loans in particular.
What Is an Interest Rate?
An interest rate is the rate you pay to borrow money, expressed as a percentage of the principal. Generally, an interest rate is determined by market factors, your credit score and financial profile, and the loan’s repayment terms, among other things.
Nearly all federal student loans have a fixed interest rate that is not determined by credit score or financial standing. (However, a credit check is made for federal Direct PLUS Loans, which reject applicants with adverse credit, except in specific circumstances.)
Rates on federal student loans are rising: For loans made from July 1, 2024, to July 1, 2025, rates are increasing by roughly half a percentage point:
• Direct Loans for undergraduate students. 6.53%, up from 5.50% for 2023-24.
• Direct Loans for graduate students. 8.08%, up from 7.05% in 2023-24.
If a loan were to have no other fees, hidden or otherwise, the interest rate and APR could be the same number. But because most loans have fees, the numbers are usually different.
What Is APR?
An APR is the total cost of the loan, including fees and other charges, expressed as an annual percentage.
Compared with a basic interest rate, an APR provides borrowers with a more comprehensive picture of the total costs of paying back a loan.
The federal Truth in Lending Act requires lenders to disclose a loan’s APR when they advertise its interest rate.
In most circumstances, the APR will be higher than the interest rate. If it’s not, it’s generally because of some sort of rebate offered by the lender. If you notice this type of discrepancy, ask the lender to explain.
APR vs Interest Rate Calculation
The bottom line: The interest rate percentage and the APR will be different if there are fees (like origination fees) associated with your loan.
Let’s say you’re comparing loans with similar interest rates. By looking at the APR, you should be able to see which loan may be more cost-effective, because typically the loan with the lowest APR will be the loan with the lowest added costs.
So when comparing apples to apples, with the same loan type and term, APR may be helpful. But lenders don’t always make it easy to tell which loan is an apple and which is a pear. To find the best deal, you need to seek out all the costs attached to the loan.
You may find that a low APR comes with higher upfront fees, or that you don’t qualify for a super low advertised APR, reserved for those with stellar credit.
How APR Works on Student Loans
Not all students (and graduates, for that matter) understand the true cost of their student loans. Borrowers may think that only private student loans come with origination fees, but that is not the case.
Most federal student loans have loan fees that are taken directly out of the balance of the loan before the loan is dispersed. It’s on the borrower to pay back the entire amount of the loan, not just the amount received at disbursement.
Federal student loan fees from Oct. 1, 2020, to Oct. 1, 2024, are as follows:
• Direct Subsidized and Direct Unsubsidized Loans: 1.057% of the total loan amount
• Direct PLUS Loans: 4.228% of the total loan amount
While interest on many other loans is actually calculated monthly or annually, interest on federal Direct Loans is calculated daily. As a result, it is slightly more difficult to do an interest rate-to-APR calculation on a federal student loan.
Comparing Private and Federal Student Loans
Federal and private student loans have their pros and cons. In general, Direct Subsidized Loans offer competitive rates that are not dependent on the borrower’s credit.
When a federal student loan is subsidized, the borrower is not responsible for paying the interest that accrues while the student is in school and during most deferment periods.
Additionally, federal student loans offer flexible repayment plans, including income-driven repayment options. Federal student loans have fixed rates, and private loans may have fixed or variable rates.
Private student loans typically take borrowers’ credit into consideration. They can be useful in bridging gaps in need if you reach a cap on federal student loan borrowing.
Understanding Interest Costs
Being able to compare an APR to another APR may help level the playing field when shopping for loans, but it’s not the only thing to consider.
You might want to take into consideration the repayment period of the loan in question, because it will also affect the total amount you’ll owe in interest over the life of the loan.
Two loans could have the exact same APR, but if one loan has a term of 10 years and the other has a term of 20 years, you’ll pay more in interest on the 20-year loan even though your monthly payments may be lower.
To illustrate this, imagine two $10,000 loans, each at a 7% interest rate, but with 10- and 20-year repayment terms.
10-year repayment:
$116.11 monthly payment
Total interest paid: $3,933
20-year repayment:
$77.53 monthly payment
Total interest paid: $8,607
As you can see, the monthly payment on the 20-year loan is lower, but you pay significantly more in interest over time.
The reverse is also true: Shortening the payback period should lower the amount that you pay in interest over time, all else being equal.
Can Refinancing Help?
When you refinance student loans, you pay off your existing federal and/or private student loans with a new loan from a private lender, aiming for a lower interest rate or a repayment timeline that works better for your finances. A brand-new loan means dealing with only one monthly payment.
Refinancing may be a good idea for working graduates who have high-interest Unsubsidized Direct Loans, Graduate PLUS Loans, and/or private loans. Just realize that when borrowers refinance federal student loans, they give up benefits like income-driven repayment plans and loan forgiveness.
To understand how interest rates, loan repayment terms, and total interest charges interplay with one another, check out this student loan refinancing calculator.
The Takeaway
APR vs. interest rate is what you may want to look at when deciding on a loan, because the APR reflects the fees involved. Even when it comes to federal student loans, fees are part of the story.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.
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