Understanding Student Loan Amortization

When deciding on a student loan repayment schedule, the option with the lowest possible monthly payment is not always best.

That’s because of amortization, the process of paying back a loan on a fixed payment schedule over a period of time. A repayment option with the lowest monthly payment typically means the loan is stretched out over a longer time frame. This results in the borrower paying more in interest than they would have with a shorter loan term and a higher monthly payment.

Exploring Amortization

Amortization is common with installment loans, which have regular monthly payments. Are student loans amortized? Yes, because they are installment loans.

With an amortized student loan, a borrower pays both the principal balance and interest each month. This is called a student loan amortization schedule. The schedule begins with the full balance owed, and the payments are then calculated by the lender over the life of the loan to cover the principal and interest.

At the beginning of an amortization schedule, payments typically cover more interest than principal. As time goes on, a bigger amount goes toward the principal.

To help determine amortization on your student loans, it’s important to first calculate the cost of the loan. You’ll need to know these three variables:

3.    The duration, or term, of the loan (usually given in months or years)

Using this information, it is possible to determine both the monthly payment on the loan and the total interest paid on the loan. A student loan interest calculator can help you figure this out.

The next step is to determine how much of each monthly payment is going toward both interest and principal. That’s when the loan’s amortization schedule comes into play.

💡 Quick Tip: Get flexible terms and competitive rates when you refinance your student loan with SoFi.

Student Loan Amortization Examples

To understand how student loan amortization works, let’s say a borrower takes out a \$30,000 student loan at 7% interest rate amortized over a 10-year repayment period.

The borrower’s monthly payment is approximately \$348. Each year, the borrower will pay about \$4,180 total on their loan. While these monthly and yearly amounts will remain the same, the proportions allocated to the principal and interest will change.

The chart below shows you what a student loan amortization schedule might look like for a \$30,000 loan at 7% interest over 10 years. The chart illustrates the principal and interest amounts monthly for the first year and the last year of the loan, and annually for the years in between.

Amortization schedule for \$30,000 student loan with 7% interest over 10 years

Date

Interest Paid

Principal Paid

Balance
January 2024 \$175 \$173 \$29,827
February 2024 \$174 \$174 \$29,652
March 2024 \$173 \$175 \$29,477
April 2024 \$172 \$176 \$29,301
May 2024 \$171 \$177 \$29,123
June 2024 \$170 \$178 \$28,945
July 2024 \$169 \$179 \$28,765
August 2024 \$168 \$181 \$28,585
September 2024 \$167 \$182 \$28,403
October 2024 \$166 \$183 \$28,221
November 2024 \$165 \$184 \$28,037
December 2024 \$164 \$185 \$27,852
2024 \$2,032 \$2,148 \$27,852

2025 \$1,877 \$2,303 \$25,852

2026 \$1,710 \$2,470 \$23,079

2027 \$1,532 \$2,648 \$20,431

2028 \$1,340 \$2,840 \$17,591

2029 \$1,135 \$3,045 \$14,546

2030 \$915 \$3,265 \$11,281

2031 \$679 \$3,501 \$7,780

2032 \$426 \$3,754 \$4,026

January 2033 \$23 \$325 \$3,701
February 2033 \$22 \$327 \$3,374
March 2033 \$20 \$329 \$3,045
April 2033 \$18 \$331 \$2,715
May 2033 \$16 \$332 \$2,382
June 2033 \$14 \$334 \$2,048
July 2033 \$12 \$336 \$1,712
August 2033 \$10 \$338 \$1,373
September 2033 \$8 \$340 \$1,033
October 2033 \$6 \$342 \$691
November 2033 \$4 \$344 \$346
December 2033 \$2 \$346 \$0
2033 \$154 \$4,026 \$0

Using this estimated example, during the first year, the borrower’s monthly payments would be about half interest and half principal. With each passing month and year of paying down debt, more of each payment is allocated to the principal. By the final year, the borrower pays only \$154 to interest and \$4,026 to principal.

To see how a longer loan term can affect amortization, here is a student loan amortization schedule with a longer timeline of 20 years. It’s important to note that a 20-year payback period isn’t standard for federal student loans — this example is to illustrate the impact of time on amortization calculations.

Amortization schedule for the first year and last year of payment on a student loan of \$60,000 with 7% interest over 20 years:

Date

Interest

Principal

Balance
January 2024 \$350 \$115 \$59,885
February 2024 \$349 \$116 \$59,769
March 2024 \$349 \$117 \$59,652
April 2024 \$348 \$117 \$59,535
May 2024 \$347 \$118 \$59,417
June 2024 \$347 \$119 \$59,299
July 2024 \$346 \$119 \$59,179
August 2024 \$345 \$120 \$59,060
September 2024 \$345 \$121 \$58,939
October 2024 \$344 \$121 \$58,817
November 2024 \$343 \$122 \$58,695
December 2024 \$342 \$123 \$58,573
2024 \$4,155 \$1,427 \$58,573

January 2043 \$31 \$434 \$4,942
February 2043 \$29 \$436 \$4,506
March 2043 \$26 \$439 \$4,067
April 2043 \$24 \$441 \$3,626
May 2043 \$21 \$444 \$3,182
June 2043 \$19 \$447 \$2,735
July 2043 \$16 \$449 \$2,286
August 2043 \$13 \$452 \$1,834
September 2043 \$11 \$454 \$1,379
October 2043 \$8 \$457 \$922
November 2043 \$5 \$460 \$462
December 2043 \$3 \$462 \$0
2043 \$206 \$5,376 \$0

In this example, each monthly payment for the 20-year duration is \$465. In January 2024, the first month of the first year of the loan, \$350 is paid towards interest, and \$115 is paid towards the principal. That’s less than 25% of the total payment, compared to 50% in the previous example.

In the last year of the loan, only \$206 total goes towards interest versus \$4,155 in the first year.

If you’re interested in expediting your loan payoff, you may want to explore different loan lengths to see how much you could save on interest if you shorten the term.

Alternative Repayment Plans and Amortization

In addition to the standard 10-year federal student loan repayment plan, there are some alternate repayment plans such as income-driven repayment (IDR) plans. There are four types of IDR plans:

•   PAYE (Pay as You Earn) plan

•   Income-Based Repayment (IBR) plan

•   Income-Contingent Repayment (ICR) plan

Each of these plans uses your income and family size to determine what your payments are.

Depending on an individual’s discretionary income and family size, the monthly payments with IDR plans are generally lower than with the standard, 10-year repayment plan because repayment is stretched out over 20 or 25 years. At the end of that time, any remaining balance you owe is typically forgiven.

While IDR may be a good option if you’re having trouble affording your monthly payments, it’s important to understand that not only will you likely pay more in total interest over the course of the loan because the term is longer, but it is also possible that your payments will dip into what is called negative amortization.

Negative amortization on a student loan is when your monthly payment is so low that it doesn’t even cover the interest for that month. When this happens, it can cause the loan balance to increase.

This is not ideal, of course, but utilizing an income-driven repayment plan is a far better option than missing payments or defaulting on a federal student loan. Using an income-driven repayment plan is also necessary if the borrower plans on utilizing the Public Service Loan Forgiveness (PSLF) program.

💡 Quick Tip: When refinancing a student loan, you may shorten or extend the loan term. Shortening your loan term may result in higher monthly payments but significantly less total interest paid. A longer loan term typically results in lower monthly payments but more total interest paid.

Managing Student Loan Amortization

To avoid the full impact of an amortized student loan there are several steps you could take to potentially help lower your interest payments.

Pay back your student loans faster than the stated term.

You can do this by paying more than you owe each month, or by making additional payments on your student loan, if you can afford to. Paying off the loan in advance may help you to pay less interest over the life of the loan.

If you opt to pay more than your minimum payments or make additional payments on your loans, it’s a good idea to let your lender know that the additional amount or payment should be applied to the principal of the loan, not the interest. That way, the extra amounts can help lower the principal amount you’re paying interest on.

Explore debt reduction methods.

For borrowers with multiple federal or private student loans who want to expedite their debt repayment, it can sometimes be hard to know where to start.

If your primary goal is to reduce the overall amount of interest you owe, you might want to consider the debt avalanche method of debt repayment. Using this technique, you choose the student loan debt with the highest interest rate and work on tackling it first. You would do this while making the minimum payment on all other loans or sources of debt. After the loan with the highest interest rate is paid off, focus on the loan with the next highest interest rate, and so on.

Refinancing student loans.

When you refinance a student loan, you’re essentially paying off your old loan or loans with a new loan from a private lender. Ideally, with refinancing, you would get a lower interest rate if your credit score and income qualify.

You might also be able to shorten the repayment term to pay off the loan faster, or lengthen the term to lower your monthly payments. Just remember, you may pay more interest over the life of the loan with a longer loan term.

When considering whether to refinance, borrowers should think carefully about the benefits their federal student loans have, such as income-driven repayment and the Public Service Loan Forgiveness option. When you refinance federal loans with a private lender, you lose access to these federal programs.

Weigh all your options to help determine what course of action makes the most sense for you.

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.

With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

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When Do Student Loans Start Accruing Interest?

Student loans — federal or private — begin accruing interest when they’re disbursed, and the borrower is responsible for paying the interest on all but subsidized federal student loans during grace periods or deferment.

There are a few exceptions, though, including periods of deferment for certain subsidized loans. And if you have federal student loans that were subject to the payment pause that began in 2020, it’s important to know when those loans begin accruing interest again in 2023.

Key Points

•   Student loans generally start accruing interest as soon as they are disbursed.

•   Subsidized federal loans do not accrue interest while the student is in school or during deferment periods.

•   The federal student loan forbearance set interest rates at 0% temporarily, resuming regular accrual in September 2023.

•   Private student loans may offer deferment with interest accruing, which is added to the principal after the pause.

•   Understanding when interest starts and how it is capitalized is crucial for managing repayment effectively.

Interest Accrual Basics and Exceptions

As a general rule, interest begins accruing on a student loan as soon as it’s disbursed. While the repayment of the loan is usually subject to a grace period (detailed later in this article), the interest continues to accrue even while the payments are paused.

The one exception is when certain loans are on deferment. Interest on the following types of loans usually does not accrue when a loan is on deferment:

•   Direct Subsidized Loans

•   The subsidized portion of Direct Consolidation Loans

•   The subsidized portion of Federal Family Education Loan Consolidation Loans

The other major exception is the federal student loan forbearance that the government implemented in March 2020. Not only did this pause federal student loan payments, it also set federal student loan interest rates at 0%, thereby pausing all interest accrual. The 2023 debt ceiling bill officially ended the payment pause, requiring interest accrual to resume on Sept. 1 and payments to resume on Oct. 1, 2023.

Some private student loan issuers offer deferment or forbearance for specific reasons. Any unpaid interest will likely accrue and be added to the principal after the payment pause, though.

The Basics of Student Loan Interest

A student who takes out a student loan (or a parent who takes out a parent-student loan in their own name) signs a promissory note outlining all the terms of the loan, which include the loan amount, interest rate, disbursement date, and payment schedule.

Federal student loans issued after July 1, 2006, have a fixed rate. The repayment default is the standard 10-year plan, but there are options, such as income-based repayment or a Direct Consolidation Loan, that can draw out repayment to double that or more. The Saving on a Valuable Education (SAVE) Plan is one of the federal student loan repayment options to consider.

The SAVE Plan is the most affordable repayment plan for federal student loans, according to the U.S. Department of Education. Borrowers who are single and make less than \$32,800 a year won’t have to make any payments under this federal income-driven repayment plan. (If you are a family of four and make less than \$67,500 annually, you also won’t have to make payments.)

Private student loans are not eligible for federal income-driven repayment plans. Interest rates on private student loans may be fixed or variable, and are based on your — or your cosigner’s — financial history. The repayment term can be anywhere from five to 20 years.

When does interest start on student loans? Federal and private student loans typically begin accruing interest when they’re disbursed. With federal student loans and most private student loans, payments are deferred until after you graduate. Interest will have accrued, and in almost all cases you’re responsible for paying it.

Interest and Grace Periods by Loan

Capitalized interest on student loans can significantly increase how much a borrower owes. This is when a lender adds unpaid interest to your principal loan balance and then charges interest on your larger balance.

The Department of Education implemented new regulations in July 2023 eliminating all instances of interest capitalization that are not specified in the Higher Education Act of 1965 (HEA). That means federal student loan interest capitalization no longer occurs when a borrower first enters repayment status following the grace period.

A federal student loan borrower who exits a period of deferment on an unsubsidized loan or who overcomes a partial financial hardship on the Income-Based Repayment Plan may face capitalized interest charges. Federal student loan interest capitalization can also occur upon loan consolidation. These are the few instances where federal law requires interest capitalization.

Fixed interest rates on newly disbursed federal student loans are determined by formulas specified in the HEA. These are the rates and loan fees (deducted from each disbursement) for the 2024–25 school year:

•   6.53% for Direct Subsidized or Unsubsidized loans for undergraduates

•   8.08% for Direct Unsubsidized loans for graduate and professional students

•   9.08% for Direct PLUS loans for graduate students, professional students, and parents

Recommended: Types of Federal Student Loans

Unsubsidized Student Loans

Federal Direct Unsubsidized Loans are available to undergraduate and graduate students with no regard to financial need.

Loan fee: 1.057%.

Grace period: While you’re in school at least half-time and for six months after graduation.

Subsidized Student Loans

Federal Direct Subsidized Loans are available to undergraduates with financial needs.

Loan fee: 1.057%.

Grace period: While you’re in school at least half-time and for six months after you leave school. The government pays the interest during those grace periods and during any deferment.

Direct PLUS Loans

Taken Out by a Parent

A Parent PLUS Loan acquired to help a dependent undergraduate is unsubsidized.

Loan fee: 4.228%.

Some private lenders refinance Parent PLUS loans at what could be a lower rate.

Grace period: First payment is due within 60 days of final disbursement, but a parent can apply to defer payments while their child is in school at least half-time and for six months after.

Taken Out by a Graduate Student or Professional Student

Grad PLUS Loans are available to students through schools participating in the Direct Loan Program.

Loan fee: 4.228%.

Grace period: Automatic deferment while in school and for six months after graduating or dropping below half-time enrollment.

Private Student Loans

Some banks, credit unions, state agencies, and online lenders offer private student loans.

Rate and fee: Rates can be fixed or variable, and rates and fees vary by lender

Grace period: Student loan interest accrual begins when a private student loan is disbursed, but payments may be deferred while a borrower is in school.

How Is Interest on Student Loans Calculated?

Student loans typically generate interest every day. Your annual percentage rate (APR) is divided by 365 days to determine a daily interest rate, and you are then charged interest each day on the total amount you owe.

That interest is added to your total balance, and you’re then charged interest on the new balance — paying interest on interest until the loans are paid off.

If you don’t know what your monthly payments will be, a student loan payment calculator can help. This one estimates how much you’ll be paying each month so you can better prepare for your upcoming bills.
The amount you pay each month will be the same, but the money first goes toward paying off interest and any fees you’ve been charged (like late fees); the remainder goes to pay down the principal of the loan.

As you pay down your loan, because the principal is decreasing, the amount of interest you’re accruing decreases. And so, over the life of your loan, less of your monthly payment will go toward interest and more will go toward the principal. This is known as amortization

💡 Quick Tip: Ready to refinance your student loan? With SoFi’s no-fee loans, you could save thousands.

How You Could Save on Interest

Because interest can add up so quickly, it’s important to pay attention to the interest rates you’re paying on your student loans.

Student loan refinancing — taking out a brand-new loan that pays off your current loans — can lower the amount of interest your loans accrue if you qualify for a lower interest rate or a shorter term. To see how refinancing might save you money, take a look at this student loan refinance calculator.

Even a small difference in interest rates could help you save a substantial amount of money paid in total interest over the life of the loan, depending on the term you select.

It’s important to know, though, that refinancing federal student loans will make them ineligible for federal benefits like income-driven repayment plans and Public Service Loan Forgiveness.

💡 Quick Tip: If you have student loans with variable rates, you may want to consider refinancing to lock in a fixed rate before rates rise. But if you’re willing to take a risk to potentially save on interest — and will be able to pay off your student loans quickly — you might consider a variable rate.

The Takeaway

When does student loan interest start accruing? The minute the loan is disbursed, and you’re usually responsible for paying it. It’s important for borrowers to understand and pay attention to capitalized interest.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOIS-Q224-1915219-V1

Student Loan APR vs Interest Rate: 5 Essential FAQs

You may have noticed when shopping around for student loans that some lenders display an interest rate, while others show an APR. What’s the difference? The main distinction is that APR (which stands for annual percentage rate) includes any fees or other charges the lender may add to the loan principal. The “interest rate” does not.

When shopping for a student loan, it’s key to know whether you’re looking at an APR or an interest rate, since this can have a significant impact on the total cost of the loan. Read on to learn more about APR vs. interest rate, what each number includes, and how to compare student loan rates apples to apples to find the best deal.

How Do Student Loan Interest Rates Work?

As with any loan, the interest rate represents the amount your lender is charging you to borrow money. It’s expressed as a percentage of your loan amount (or principal) and doesn’t reflect any fees or other charges that might be connected to your loan. Interest rates can be fixed (the same for the life of the loan) or variable (may fluctuate over the life of the loan).

Interest rates work differently depending on whether a student loan is federal or private. Congress sets the interest rate for federal student loans. The rate is fixed — and it’s the same for all borrowers. The federal student loan interest rate for undergraduates is 6.53% for new loans taken out for the 2024-25 school year, effective from July 1, 2024 to July 1, 2025.

Private student loan companies are allowed to set their own interest rates, which may be higher or lower than rates for federal loans. Interest rates on private loans may be fixed or variable and typically depend on the creditworthiness of the borrower (or cosigner) — those with higher credit scores generally qualify for lower rates, while borrowers with lower credit scores tend to get higher rates.

💡 Quick Tip: You can fund your education with a low-rate, no-fee private student loan that covers all school-certified costs.

What Is the Student Loan APR, and How Is It Different From Interest Rate?

A loan’s annual percentage rate (APR) represents a more comprehensive view of what you’re being charged. It tells you the total cost of the loan per year, including any fees, such as an origination fee. Because of that, a loan’s APR may be higher than its interest rate.

Looking at the APR helps you compare different loan offers and get a real picture of the overall cost you will pay for borrowing money for your education. If a loan doesn’t have any fees then the interest and the APR will be the same.

Federal student loans publish interest rates but not the APRs, so it’s important to keep in mind that the headline interest rate of a federal student loan is not the total cost of that loan. These loans also charge an origination fee, which is 1.057% for Direct Subsidized and Direct Unsubsidized loans, and 4.228% for Direct PLUS loans (unsubsidized loans for the parents and graduate/professional students.)

For private student loans, origination fees vary by lender. While some private lenders charge origination fees, it’s possible to find a private loan that doesn’t come with these fees. However, it’s important to keep in mind that private student loans generally don’t come with the same protections as federal student loans, such as income-driven repayment plans and forgiveness programs.

What Fees / Charges Might Be Included in a Student Loan APR?

For student loans, the most common fee is the loan origination fee. Whether the loan is federal or private, this fee is typically based on a percentage of the total loan amount and will be deducted from your loan amount before the loan is dispersed. This means that if you borrow \$10,000 and the origination fee is 1.057%, \$105.70 will be deducted from your total loan amount — so you would actually receive \$9,894.30 for the year.

While origination fees can be small, the cost can add up. Because these fees are deducted from the total loan amount, you are paying the fee with borrowed money and will pay interest on the fee paid.

Both private and federal student loans may also have late fees and returned payment (or insufficient funds) fees, both of which add to the total amount you must repay. However, you can avoid these fees by always paying your bill on time and making sure you have enough money in your bank account to cover the payment.

Fees vary widely from one lender to the next, and some private lenders may not charge any fees.

If a Loan’s Interest Rate and APR Are the Same, Does That Mean There Are No Hidden Fees?

Typically, yes. Just keep in mind that interest rates published for federal student loans are not APRs and do not include the origination fee. This fee will come out of the amount of money that is disbursed (paid out) to you while you’re in school.

The student loan APRs listed by private lenders include any additional charges and fees. If the lender doesn’t charge any fees, the APR and interest rate will be the same.

Recommended: Pros and Cons of Refinancing Student Loans

When Shopping for a Loan, Should I Look at Interest Rate, APR, or Both?

Whenever available, you’ll want to look at the APR of a student loan, since this number allows a more apples-to-apples comparison of loan costs. If you just compare straight interest rates, you can miss the big picture in terms of the total cost of the loan. Sometimes those additional fees can make a big impact.

It’s also important to know when the interest rate or APR will kick in. Although the interest rate is the same for federal Direct Subsidized and Direct Unsubsidized loans, the latter loan ends up costing significantly more because interest starts accruing from the time the funds are disbursed. With subsidized federal loans, the interest does not accrue while you are still in school.

With private student loans, interest typically begins to accrue as soon as the loan money is disbursed to your school.

Whether interest starts accruing immediately or later, you typically don’t have to start making any payments on private or federal student loans until after you graduate.

💡 Quick Tip: It’s a good idea to understand the pros and cons of private student loans and federal student loans before committing to them.

The Takeaway

A student loan’s interest rate is the cost of borrowing money and is expressed as a percentage of the loan amount. APR includes the interest rate as well as the additional costs and fees associated with borrowing. As a result, it gives you a more complete picture of the total cost of the loan. Understanding APR vs. interest rate is important when you’re researching best rates for student loans. It will help you make informed decisions that may lower your cost of borrowing.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.

FAQ

What is a good APR for a student loan?

For new loans taken out for the 2024-25 school year, the federal student loan interest rate is 6.530% for undergraduates (whether the loan is unsubsidized or subsidized). For graduate students it’s 8.08%, and for parents it’s 9.08%.

Average private student loan annual percentage rates (APRs) range from just under 4% to almost 15% percent.

Is APR better than interest rate?

The annual percentage rate (APR) gives you a more accurate picture of the true cost of financing. The APR of a loan tells you how much you will pay for a loan over the course of a year after accounting for the interest rate as well as any extra costs, like origination fees.

When comparing loan offers, it’s generally better to compare APRs than interest rates, since this allows you to compare loan offers apples to apples.

Can APR and interest rate be the same?

Yes. If no fees are added to your loan amount, the interest rate and the annual percentage rate (APR) will be the same.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOIS-Q224-1914675-V1

What Is the APR for Student Loans and How Is It Calculated?

Student loans are complicated, especially when it comes to figuring out how much the loan will actually cost you over time. APR, or annual percentage rate, reflects the total cost of the loan, including the interest rate and any fees.

Knowing how APR formulas affect your student loans is an important part of maintaining financial health, and can even help you decide whether or not you should look into alternative loan repayment strategies, like consolidation or refinancing.

What Is APR For Student Loans?

As briefly mentioned, your annual percentage rate, known as “APR,” is the interest and fees you are responsible for paying on your student loan balance over the course of a year. The APR formula shows you your actual cost of borrowing, including your interest rate and any extra fees or costs, like origination fees or forbearance interest capitalization.

APR vs Interest Rate on Student Loans

The interest rate on your student loan is the amount your lender is charging you for the loan, expressed as a percentage of the amount you borrowed. For example, the interest rate for Federal Direct Subsidized Loans and Unsubsidized Direct Loans is currently 6.53% for 2024-25, which means that you would be responsible for paying your lender 6.53% of the amount of money you borrowed in yearly interest.

That 6.53%, however, does not include other costs that are considered in the APR formula, including disbursement costs. For loans with no fees, it is possible that the APR and interest rate will match. But in general, when comparing APR vs interest rate, the APR is considered a more reliable and accurate explanation of your total costs as you pay off your student loans. If you’re shopping around for student loans or planning to refinance your loans, the APR offered can help you decide which lender you would like to work with.

Recommended: Student Loan Info for High Schoolers

An Example of How APR Is Calculated for Student Loans

Let’s say you take out a student loan for \$20,000 with an origination fee of \$1,000 and an interest rate of 5%. An origination fee is the cost the lender may charge you for actually disbursing your loan, and it is usually taken directly out of the loan balance before you receive your disbursement.

So, in this example, even though you took out \$20,000, you would only receive \$19,000 after the disbursement fee is charged. Even though you only receive \$19,000, the lender still charges interest on the full \$20,000 you borrowed.

The APR accounts for both your 5% interest rate and your \$1,000 origination fee to give you a new number, expressed as a percentage of the loan amount you borrowed. That percentage accurately reflects the true costs to the consumer. (In this example, if the loan had a 10-year term, the APR would be 6.124% )

What Is a Typical Student Loan APR?

For federal student loans, interest rates are determined annually by Congress. Federal loans also have a disbursement fee, which is a fee charged when the loan is disbursed.

APRs for federal student loans may vary depending on the loan repayment term that the borrower selects. Federal student loans are eligible for a variety of repayment plans, some of which can extend up to 25 years. Generally speaking, the longer the repayment term, the larger amount of interest the borrower will owe over the life of the loan.

Typical APR for Private Student Loans

The interest rate on private student loans will vary by lender and so will any fees associated with the loan. As of June 2024, APRs on private student loans may vary from around 4% to upwards of 16% for fixed interest rates.

The interest rate you qualify for is generally determined by a variety of personal factors including your credit score, credit history, and income, among other factors. In addition to varying APRs, private student loans don’t offer the same benefits or borrower protections available for federal student loans — things like income-driven repayment plans or deferment options. For this reason, they are generally considered only after all other sources of funding have been reviewed.

How to Find Your Student Loan APR

By law, lenders are required to disclose the APR on their loans — including student loans. These disclosures help you make smart financial choices about your loans and ensure that you’re not blindsided by mystery costs when you take out a loan.

For federal student loans, the government lists the interest rates and fees online, but make sure to carefully examine any loan initiation paperwork for your exact APR, which will depend on other factors including the amount you plan to borrow, the interest rate, and origination fees.

If you’re currently paying off federal student loans, your student loan servicer can tell you your APR. If you use online payments, you can probably see your APR on your student loan servicer’s website or on your monthly bill.

If you’re shopping around for private student loans, your potential lenders must disclose the APR in their lending offer to you. Your APR will vary from lender to lender depending on many factors, which can include your credit score, any fees the lender charges, and how they calculate deferred interest, which is any unpaid interest that your minimum payment doesn’t cover.

One student loan tip — compare quotes and offers from various lenders closely. Once you’ve decided on a lender and taken out a loan, your APR should be reflected on your loan paperwork and usually on your lender’s online payment system.

Recommended: Understanding a Student Loan Statement: What It Is & How to Read It

The Takeaway

APR is a reflection of the total amount you’ll pay in both interest rate and fees for borrowing a student loan. Interest rate is just the amount of interest you will be charged. On loans with no fees, it’s possible for the interest rate and APR to be the same. Interest rates and fees for different types of federal student loans are published, but individual APRs may vary based on the amount you borrow and the repayment term you select.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.

FAQ

What is the APR on student loans?

APR or annual percentage rate is a reflection of the interest rate plus any fees associated with the loan. It provides a picture of the total cost of borrowing a loan and is helpful in comparing loans from different lenders.

Is the APR the same on subsidized and unsubsidized student loans?

The interest rate for unsubsidized and subsidized federal student loans is sent annually by Congress. These loans also have an origination fee. For the 2024-2025 school year the interest rate on Direct Subsidized and Unsubsidized loans is 6.53% and the origination fee is 1.057%. The APR for your loan will be determined by factors including the repayment term you select.

What is the typical interest rate on private student loans?

Interest rates on private student loans vary based on a variety of factors such as the lender’s policies, and individual borrower characteristics such as their credit score and income, among other factors. As of June 2024, interest rates on fixed private student loans hovered around 4% to upwards of 16%.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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Federal Student Loan Interest Rates Guide

The Department of Education announced that federal student loan interest rates are increasing to 6.53% for the 2024-25 school year on undergraduate loans, up from 5.50% from the previous year.

Here, we’ll discuss how federal student loan interest rates are determined, how they have changed over the years, and when they may be higher than private lender rates.

Overview of Federal Student Loan Interest Rates

The 2024-25 interest rate on Direct Subsidized loans for undergraduates is now 6.53% — the highest it’s been in history.

Below is an overview of how rates have increased over the last four years:

School Year 2021 – 2022

School Year 2022 – 2023

School Year 2023 – 2024

School Year 2024 – 2025

Direct Subsidized and Unsubsidized Loans for Undergrads 3.73% 4.99% 5.50% 6.53%
Direct Unsubsidized Loans for Graduate or Professional Students 5.28% 6.54% 7.05% 8.08%
Direct PLUS Loans for Graduate or Professional Students or Parents of Undergrads 6.28% 7.54% 8.05% 9.08%

Recommended: What’s the Average Student Loan Interest Rate?

Why Federal Student Loan Interest Rates Can Vary From Year to Year

The reason that federal student loan interest rates fluctuates has to do with how and when federal student loan rates are set. By federal statute, they are determined once a year and are based on the high yield of the 10-year Treasury note last auctioned in May (for the upcoming school year).

That yield is then added to a required percentage to get the federal interest rate for loans disbursed on or after July of that year.

So in May 2020, when businesses were in lockdown due to Covid-19, the high yield of the 10-year Treasury note was less than 1%. In May 2022, as the Federal Reserve began to try to curb inflation by raising its rate, the high yield or index rate on the 10-year Treasury note was 2.94%, and in May 2023, as the economy was looking up in terms of inflation, the index rate was 3.448%.

💡 Quick Tip: Need a private student loan to cover your school bills? Because approval for a private student loan is based on creditworthiness, a cosigner may help a student get loan approval and a lower rate.

Required Markups to the 10-Year Treasury Index Rate to Determine Federal Student Loan Interest Rates

The required percentage added to the high yield of the 10-year Treasury note last auctioned in May 2023 depends on the type of loan and borrower. The added percentages follow this schedule:

•   For Direct Subsidized and Unsubsidized loans for undergraduate students, the added percentage is 2.05%.

•   For Direct Unsubsidized loans for graduate and professional students, the added percentage is 3.60%.

•   For Direct PLUS loans for parents of undergraduate students and for graduate or professional students, the added percentage is 4.60%.

How Federal Student Loan Interest Rates Have Been Set Over the Years

The federal student loan program began in the 1960s. Over time, the way rates are set has changed due to legislative action. Here’s a general timeline of how federal student loan interest loans have been set:

From the 1960s to 1992

Originally, Congress set the interest rates for student loans. The rates were fixed and ranged from 6% in the beginning to 10% for the years 1988 to 1992.

From 1993 to 2003

Congress amended the law so that rates were variable rather than fixed and reset annually. The formula for federal student loan interest rates was the interest rate on short-term Treasury securities at a set time plus 3.1%. The rate was capped at 9.0%. Over the next six years, Congress lowered the added percentage and the cap.

Soon after switching to variable rates, Congress passed the Student Loan Reform Act, which authorized the Direct Loan program. The law changed the formula for calculating interest rates so that they were pegged to 10-year Treasurys, which aligned with the term or length of student loans. The markup was lowered to 1.0%, and the new formula was to be used starting in five years.

But in 1998, because the Direct Loan program was taking longer than expected to replace the old loan program, where banks provided the loans instead of the government, Congress postponed when the new formula would be used until 2003. In the meantime, the old formula was used but with a 2.3% add-on (instead of 3.1%).

From 2003 to Present

Several bills have been passed trying to make student loans more affordable, including a bill that fixed the rate at 6.8% starting in 2006. For Direct Unsubsidized loans for undergraduate students and Direct Unsubsidized loans for graduate and professional students, the federal student loan interest rate stayed at 6.8% through 2013.

In 2013, a law enacted the current formula used to calculate federal student loan interest rates.

How Private Student Loan Interest Rates Differ From Federal Loan Rates

Of course, private student loan rates will fluctuate with market trends and from lender to lender. That said, private student loan rates for 10-year loans are generally higher than the federal interest rate when you are comparing rates concurrently on offer.

However, this isn’t always the case when it comes to student loans for parents or graduate/professional students. For the 2024-25 school year, the interest rate on Direct PLUS loans is 9.08%. But in June 2024, some private student loan rates are actually lower.

Also, private student loan rates (and refinance rates) can be lower for a loan that has a shorter term length than the standard 10 years of federal loans.

What’s more, private student loan rates and student loan refinance rates that are currently on offer can very well be lower than the federal interest rate you received at the time of getting your loan.

💡 Quick Tip: It’s a good idea to understand the pros and cons of private student loans and federal student loans before committing to them.

What Private Lenders Consider When Determining Your Interest Rate

As mentioned earlier, private lenders will look at your creditworthiness when determining your interest rate. This involves considering such factors as:

•   Credit History – When entering college, most students have little to no credit history. That means the lender could be unsure of their ability to repay the loan since students don’t typically have a history of paying any loans. This can lead to a higher interest rate.

•   Your School – Most four-year schools are eligible for private loans, but some two-year colleges aren’t. Additionally, applicants typically have to be enrolled at least half-time to qualify for private student loans.

•   Your Cosigner’s Finances – Since many private student loan applicants are relatively new to debt and have no credit history, they might be required to provide a cosigner. A cosigner shares the burden of debt with you, meaning they’re also on the hook to pay it back if you can’t. A cosigner with a strong credit history can potentially help secure a lower interest rate on private student loans.

The Takeaway

Federal student loan interest rates have fluctuated over the years. Currently, they are higher for 2024-25 than they were for 2023-24.

Typically, federal interest rates are lower than private student loans rates offered in the same year. But they can also be higher, particularly for parents borrowing to pay their children’s tuition and for graduate or professional students.

Also, private student loan rates (and refinance rates) on offer at the present time can be lower than federal interest rates from previous years or they can be lower on loans for term lengths shorter than the standard 10 years.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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