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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.

The grace periods for each kind of student loan repayment are good to know. So are the various loan interest rates and what happens during any period of deferment or forbearance.

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.

Private student loan interest rates 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.

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

With the exception of subsidized federal student loans, any unpaid loan interest during grace periods will be capitalized, or added to the loan balance, when repayment begins. Capitalized interest on student loans can significantly increase how much a borrower owes.

Here are details about different kinds of student loans. Congress approves interest rates for Department of Education loans that span July 1 to June 30 the following year. These are the rates and loan fees (deducted from each disbursement) as of this writing.

For the 2022-2023 school year, the interest rate on Direct Subsidized or Unsubsidized loans for undergraduates is 4.99%, the rate on Direct Unsubsidized loans for graduate and professional students is 6.54%, and the rate on Direct PLUS loans for graduate students, professional students, and parents is 7.54%. The interest rates on federal student loans are fixed and are set annually by Congress.

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: Interest 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 generate interest every day. Your annual percentage rate 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.

Interest Accrual During Deferment or Forbearance

If you can’t afford payments on federal student loans once they begin, deferment and forbearance may allow you to hit pause.

The big difference is that interest always accrues during forbearance (except in the case of Perkins Loans), while during deferment, interest on some types of loans usually does not accrue.

They are:

•   Direct Subsidized Loans

•   Perkins Loans

•   The subsidized portion of Direct Consolidation Loans

•   The subsidized portion of Federal Family Education Loan Consolidation Loans

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.

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.

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.

Interested in seeing if you could get a lower rate or different term by refinancing? If so, look into SoFi refinancing.

There are no fees.

Check your rate and check out the perks of refinancing with SoFi.


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IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL SEPTEMBER 1, 2022 DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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.
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Understanding How Direct Stafford Loans Can Help Fund Your Education

Direct Stafford Loans (or simply Stafford Loans or Direct Loans) are the most common federal student loans available for students seeking financial aid for college. While there are Stafford Loan limits, most students who fill out the Free Application for Student Aid (FAFSA®) can receive some amount of financial aid, whether those Stafford Loans are subsidized or unsubsidized.

Students interested in getting federal aid—including grants, federal student loans, and federal work-study—must submit the FAFSA annually. Here are some other important facts, deadlines, and tips to get you ready to apply for federal financial aid.

What Is a Direct Stafford Loan?

A Stafford Loan is a common name for the federal student loans available to eligible students directly from the US Department of Education. These subsidized or unsubsidized federal loans are often referred to as Stafford Loans or Direct Stafford Loans, which are offered under the William D. Ford Federal Direct Loan (Direct Loan) Program.

In 1988, Congress changed the name of the Federal Guaranteed Student Loan program to the Robert T. Stafford Student Loan program in honor of higher education champion, Senator Robert Stafford. This is one reason why Stafford Loans are sometimes referred to by different names.

Direct Stafford Loans are taken out in the student’s (not a parent’s) name. Before one accepts any loans as part of a financial aid package, it’s important to understand the fundamental differences between the two types of Stafford Loans you can apply for: subsidized or unsubsidized.

Subsidized vs Unsubsidized Loans

There are two different types of Direct Stafford Loans: subsidized and unsubsidized. With a subsidized Stafford Loan, the government will pay the interest that adds up while the borrower is in school at least half-time, during the loan’s grace period (the first six months after graduating or dropping below half-time enrollment), and during a deferment—an official postponement of payments. In contrast, borrowers with unsubsidized student loans are responsible for all of the interest that accrues on the loan at all times.

To be eligible for a subsidized loan, borrowers must meet the income requirements for need-based aid. The school determines the amount a student is able to borrow. As of 2012, subsidized Stafford Loans were no longer available for graduate or professional students.

Related: Explaining Federal Direct Unsubsidized Loans

Unsubsidized Stafford Loans start to accrue interest as soon as the loan is disbursed. These loans are available to undergraduate, graduate, and professional students, and there is no requirement to demonstrate financial need.

Students are not required to start paying back unsubsidized Direct Stafford loans while they are in school, but they are responsible for the interest at all times—including before graduation and during the loan’s grace period.

Students can estimate their federal student aid eligibility before filling out the FAFSA. If students have the flexibility to only accept some of the financial aid package, it may be worth accepting subsidized loans before unsubsidized (if eligible) in order to take advantage of the potential interest savings.

Stafford Loan Limits and Rates

It is up to a student’s school to determine which loan type and loan amounts they receive every year. There are Direct Stafford Loan limits, which are determined by a student’s year in school and whether they are considered a dependent or independent student.

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What Is the Direct Stafford Loan Interest Rate?

Interest rates for federal student loans are fixed for the life of the loan and are set annually. For the 2022-2023 school year, the interest rate on Direct Subsidized or Unsubsidized loans for undergraduates is 4.99%, the rate on Direct Unsubsidized loans for graduate and professional students is 6.54%, and the rate on Direct PLUS loans for graduate students, professional students, and parents is 7.54%. The interest rates on federal student loans are fixed and are set annually by Congress.

What Are Direct Stafford Loan Limits For Undergraduates?

First-year undergraduate dependent students are eligible for Direct loans of up to $5,500, but only $3,500 of that amount can be subsidized. (Note: this excludes students whose parents are ineligible for Direct PLUS Loans.)

This amount can increase with each year you’re in school at least half-time, with even higher limits for eligible graduate students.

For undergraduate dependent students, the current annual loan limits are as follows :

•  First Year: $5,500 maximum, no more than $3,500 subsidized

•  Second Year: $6,500 maximum, no more than $4,500 subsidized

•  Third Year and Beyond: $7,500 maximum, no more than $5,500 subsidized

•  Total Direct Stafford Loan Limits: $31,000 max, $23,000 subsidized

The loan limit amounts vary based on a student’s year in school. Additionally, loan limits differ for dependent and independent students. Independent students are generally considered to be financially independent by meeting certain eligibility requirements. Graduate or professional students can take out a maximum of $20,500 annually, but only in unsubsidized loans.

Dependent students whose parents are not eligible for a Direct Parent PLUS Loan, might be able to take out additional Direct Unsubsidized Loans.

Additionally, students can’t receive Direct Subsidized Loans for more than 150% of the published length of their degree program. For instance, if you are in a four-year bachelor’s degree program, the maximum amount of time you can receive Direct Subsidized Loans is six years.

Applying for a Direct Stafford Loan

In order to qualify for Direct Loans, students must be a US citizen, permanent resident, or eligible non-citizen; enrolled at least part-time in an accredited college; and not in default on any other education loan.

Students can apply for all federal financial aid online via the FAFSA website. According to the Department of Education, almost every FAFSA applicant is eligible for some kind of student aid package that may include federal student loans. Unlike most private student loans, however, most federal student loans do not require a credit check or a cosigner.

Typically, a student’s school will apply their student loan funds to pay for tuition, fees, room and board, and other school charges. (They also factor in any scholarships, federal grants and work-study.) If any additional funds remain, the money will be returned to you, which is why it’s important to carefully consider the amount of loan funding you need.

While a loan refund may be nice in the moment, that money will still need to be repaid (with interest)—though some students might find the funds useful for other school-related items like books and technology. (All Direct Stafford Loan funds must be used for education expenses.)

When Do You Have to Pay Back Your Direct Stafford Loan?

The simple answer is: after the grace period. The grace period for Direct Stafford Loan repayment begins the day the borrower officially leaves school, and lasts for six months. Also, if you change your student status to less than half-time enrollment, that starts the clock on the grace period, too.

Take note: educational institutions define “half-time enrollment” in different ways. The status is usually, but not always, based on the number of hours and credits in which a student is enrolled. When in doubt, check with the school’s student aid office to confirm their official definition.

The total timeframe of the Direct Stafford Loan repayment grace period: six months, and not a day more (with a handful of exceptions ). Another thing to keep in mind about that grace period: students may want to start making payments on the loan during the grace period.

Even though grace periods are meant to give borrowers time to adjust to their post-school life, the interest on an unsubsidized loan is still accruing during the grace period. At the end of the grace period, the accrued interest is capitalized, or added to the principal amount of the loan.

One quick tip while on the subject of grace periods: Find out who the student loan servicer is so you know who to contact with any questions. Borrowers don’t get to choose their own federal student loan servicer. They’re assigned by the Department of Education to handle billing and other services.

Repaying Direct Stafford Loans

The default payment plan is the Standard Repayment Plan, which sets the monthly payment to the amount that will pay off the loan in 120 payments, or 10 years. However, there are alternative federal repayment plans to consider that can help lower monthly payments. (Note that lowering the monthly payments is generally the result of extending the repayment term, which will usually make the loan more expensive in the long run).

Direct Consolidation Loans

There are also Direct Consolidation Loans that allow borrowers to consolidate their federal student loans into one new loan, at an interest rate that’s the weighted average of all the existing interest rates (rounded up to the nearest eighth of a percent). That typically doesn’t help save money on interest but does streamline repayment (one loan, one lender, one payment to make each month).

Student Loan Refinancing

Another option is to refinance student loans with a private lender, which may be appealing to borrowers who are in a financially stable place and have federal and/or private student loans.

Refinancing lets you pay off the loans you already have with a brand-new loan from a private lender. This can be done with both federal and private loans. The new loan from a private lender may allow borrowers to breathe easier with interest rates and repayment terms that work better for them.

But refinancing isn’t without its downsides. Federal student loans that are refinanced with a private lender, will lose all the federal benefits and protections—like income-driven repayment options and loan forgiveness for public service work. Borrowers who want to keep their federal student loans as federal student loans could consider consolidation instead.

The Takeaway

Direct Stafford Loans are federal student loans offered to students to help them pay for college. There are two major types of direct loans, subsidized and unsubsidized. Students with subsidized student loans are not responsible for any accrued interest while they are enrolled at least half-time and during the loan’s grace period. Unsubsidized student loans begin accruing interest as soon as they are disbursed, and borrowers are responsible for repaying all of the accrued interest at all times.

The size of a Stafford Loan depends on such factors as education costs and financial aid eligibility. If your costs are higher than your awarded federal student loans and other financial aid, one way to cover the gap is with a private student loan.

SoFi offers in-school loans at competitive rates and with no origination fees.


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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 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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IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL SEPTEMBER 1, 2022 DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC), and by SoFi Lending Corp. NMLS #1121636 , a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law (License # 6054612) and by other states. For additional product-specific legal and licensing information, see SoFi.com/legal.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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Private vs. Public College: The Pros & Cons of Both

When it comes to selecting a college, one big consideration is whether to attend a private vs. public college. A key difference between private and public colleges lies in how they are funded and operated. Public colleges get much of their funding from local and state governments, while private ones are largely sustained with tuition, fees, and donations.

Going the public route is the most common scenario. In the fall of 2020, approximately 14.6 million students attended public institutions while 5.1 million were enrolled in private institutions, according to the National Center for Education Statistics.

Students who are debating between private and public colleges may want to consider factors like cost, quality of education, campus life, and how they plan to pay for college. Read on for more information on each of these categories.

Factors to Consider When Evaluating Public vs Private Colleges

Choosing a college is a personal decision, so it’s important to factor in individual goals and needs as you compare private vs public colleges. In addition to the factors below, things like what you hope to study, and how close you’d like to be to home, among other personal preferences, will influence how you choose a college.

Now, let’s dig into more about potential advantages and drawbacks of each choice. Even though a few colleges and universities are mentioned by name—shout out to them—we’re not affiliated or endorsed by any of the institutions. Just FYI. Alright, let’s talk about the differences between public and private colleges.

The Cost of Public vs Private Colleges

One reason that attending public colleges is the more popular route is that they are often less expensive than private institutions. Public institutions are often especially affordable for in-state students, who typically get a break on tuition. According to US News, during the 2020-2021 school year, the average cost of tuition and fees at a public college with in-state tuition was $11,171, and $26,809 for out-of-state students. At private colleges, the avast of tuition and fees was $41,411.

That said, private colleges and universities may also offer scholarships, fellowships, and other kinds of need- or merit-based financial aid. And, even some top-tier universities have virtually done away with tuition for students whose families have certain levels of family income. So high-achieving students might actually get a better or comparable deal at a private institution depending on their family’s financial situation.

Differences in Educational Quality

The highest ranking public schools in the country include UCLA, UC Berkeley, the University of Virginia, the University of Michigan (Ann Arbor), and UC Santa Barbara. At these schools and many others, students can get a top-notch education at a relative steal if they qualify for in-state tuition.

However, many public schools have enormous student populations, which can mean large class sizes, difficulty getting into your most desired classes, and less personal attention from faculty and administrators. For example, the University of Central Florida has just over 59,000 undergraduates, resulting in a student-to-faculty ratio of 30 to 1.

By comparison, Pomona College in Southern California has a population of around 1,500 students and a student-to-faculty ratio of just seven students to one faculty member. Beyond class size, some private institutions are often able to deliver a world-class education; every one of the top 10 highest-ranking schools in the country are all private schools.

Note that there can be a big difference between private non-profit schools and for-profit schools. Most of the prestigious private universities people are familiar with, like Harvard and Princeton, are non-profits. Students who attend for-profit colleges have lower graduation rates than their non-profit counterparts.

Specific Majors or Programs of Study Available

Private colleges, particularly smaller liberal arts colleges may have fewer majors or programs available to students than larger public universities. As you are evaluating schools, consider the field(s) of study you are most interested in and understand the options available at the schools you are considering.

On a related note, students interested in pursuing research opportunities may have a better chance of conducting research at a larger university. Public universities may have many labs and teams conducting research. Private universities may have less funding but are likely also conducting research, so undergraduate research opportunities may be possible too. Again, consider the programs you are specifically interested in and ask an admissions counselor what research opportunities are available to undergraduates in that field or major.

Campus Life

For some students, the large size of many public institutions is another factor in the pro column. This environment means there are a great variety of potential groups to join, activities to participate in, or classmates to become friends with.

A large school means many different classes and majors to choose from. If this appeals to you, it can expand your network and make your college experience much more interesting. Private schools are also likely to have clubs and activities available for students, though it may be on a smaller scale.

Both public and private schools can be a great choice for students interested in athletics. Public schools are most likely to have a wide variety of active sports teams, and most of the top-ranking colleges for student-athletes are public.

However, many private universities have successful teams, as well. If it’s important to you, or you’re a student-athlete yourself, you could check out the strength of specific sports programs at the colleges you’re considering.

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Financing Your Education

Some students and their families cover tuition costs (or a portion of costs) with savings, there are a variety of other sources of finances to help students pay for college. As mentioned, public universities generally have a less expensive sticker price than private schools, but private schools may offer more financial aid to students. So, don’t rule out a private school on cost alone.

To apply for federal student aid, the first step is filling out the Free Application for Federal Student Aid (FAFSA®). Colleges will use this information to help determine how much aid, and what types, a student qualifies for. Federal aid includes things like Pell Grants for low-income students, work-study, and federal student loans. Both private and public schools may offer scholarships to students as well.

For the 2022-2023 school year, the interest rate on Direct Subsidized or Unsubsidized loans for undergraduates is 4.99%, the rate on Direct Unsubsidized loans for graduate and professional students is 6.54%, and the rate on Direct PLUS loans for graduate students, professional students, and parents is 7.54%. The interest rates on federal student loans are fixed and are set annually by Congress.

For students who still need additional funding, a variety of lenders offer private educational loans. Private student loans typically take the borrower’s credit history, and that of any cosigner, into consideration. And while federal student loan interest rates are always fixed, private student loan interest rates can be fixed or variable. (Fixed means the rate will stay the same over the course of the loan, while variable rates can change based on market fluctuations.) If possible, it’s wise to exhaust all federal aid options before seeking private student loans.

The Takeaway

Both public and private colleges and universities can offer an excellent education to students. Differences to consider when deciding between a private or public school include the cost, the programs of study available to students, quality of education, campus life, and sources of funding for school. Depending on individual preferences and circumstances, students may find a public school better suits their needs or vice versa.

After exhausting all federal loan and aid options, students may consider borrowing a private student loan to pay for college. Private student loans can be used to pay for both private and public college. SoFi’s private student loans have absolutely no origination or late fees. The applicant (and potentially their cosigner) can fill the application out entirely online. And when it comes time to repay the private student loans, SoFi offers flexible repayment options and exclusive member benefits.

Heading off to college soon? Learn more about SoFi private student loans.



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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC), and by SoFi Lending Corp. NMLS #1121636 , a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law (License # 6054612) and by other states. For additional product-specific legal and licensing information, see SoFi.com/legal.

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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 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 Lending Corp. and its lending products are not endorsed by or directly affiliated with any college or university unless otherwise disclosed.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third-Party Brand Mentions: No brands or products 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.

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Examining the Different Types of Student Loans

With the average annual cost of college for the 2021-2022 school year $10,740 for public four-year in-state and $38,070 for private non-profit four-year schools, it’s not uncommon for students to use loans to help pay for their education.

The two major umbrellas to consider are federal student loans and private student loans. Federal student loans are those backed by the U.S. Department of Education, while private student loans are offered through financial institutions such as banks, online lenders, and credit unions.

Knowing what types of student loans are available to you and understanding your student loan statement can help you figure out the best way to save money in the long run.

What Are The Different Types of Student Loans?

One of the first things to understand is the difference between federal and private student loans.

Federal student loans are loans offered by the government, at a fixed interest rate and with certain restrictions. Depending on borrower needs, students could qualify for either subsidized or unsubsidized federal loans (more on those, later). Federal student loans come with protections for borrowers’ loans like income-driven repayment options, deferment, forbearance, and access to the Public Service Loan Forgiveness (PSLF) program. Most federal student loans also have annual lending limits .

For some students, federal student loans aren’t enough to cover the cost of a college education. Some turn to scholarships, grants, or a part-time job to fill in the gaps. Other students rely on private student loans, offered by lenders and financial institutions, to cover the cost of college.

Applying for Federal Student Loans

The first step in the federal student loan process is to fill out the Free Application for Federal Student Aid (FAFSA®). That will involve compiling some family financial history. Even students who don’t think they’ll qualify for financial aid will likely still want to fill out a FAFSA. All federal student loans require a FAFSA first. And some schools use information from the FAFSA to determine eligibility for other types of aid like scholarships or grants.

All federal student loans require a FAFSA first.

After filling out the FAFSA, students will receive a financial aid package which includes any federal aid awarded to the student including grants, work study, and loans. Depending on financial circumstances, the loans will either be subsidized or unsubsidized.

The Different Types of Federal Student Loans

Think of federal student loans as an overarching category. There are different types of federal student loans, each of which have different eligibility requirements, borrower maximums (or not), and interest rates. Understanding all your options means you’ll be better prepared to determine the best way to finance your education.

Recommended: Private Student Loans vs. Federal Student Loans

For the 2022-2023 school year, the interest rate on Direct Subsidized or Unsubsidized loans for undergraduates is 4.99%, the rate on Direct Unsubsidized loans for graduate and professional students is 6.54%, and the rate on Direct PLUS loans for graduate students, professional students, and parents is 7.54%. The interest rates on federal student loans are fixed and are set annually by Congress.

Direct Subsidized vs. Unsubsidized Loans

Federal Direct loans, also known as Stafford Loans, can be either subsidized or unsubsidized. With a subsidized student loan, the government will cover the accrued interest while the borrower is enrolled in school, during the grace period, and during any periods of deferment. Not having to pay interest on your loans during school can really help—especially since interest accrues and capitalizes, or gets added to the principal loan amount, and then accrues more interest. There are no subsidized federal loans for graduate students—only for undergrads.

The government does not pay the interest on unsubsidized Direct loans. That means, even while you’re in school, the loans are accruing interest. You don’t have to make payments on the loans while you’re a full-time student, but interest is building up. As the interest accrues, it is added to the loan’s principal.

Recommended: Student Loan Grace Periods: What You Need to Know

That’s why it’s possible to have a higher remaining loan balance than the initial loan amount after graduation. Individuals with an unsubsidized student loan do have the option to make interest-only payments on the loan during periods of deferment, including while they’re in school, but are not required to do so.

Federal loans have fixed interest rates (that are set annually), meaning they don’t change over the life of the loan.

Federal student loan borrowing limits vary depending on factors like your year in school and whether or not you are a dependent student. For example, first-year undergrads who are considered independent or whose parents are not able to take out parent loans have a maximum borrowing amount of $9,500 (of which only $3,500 can be subsidized) annually. The maximum for dependent students is $5,500 in their first year, with the same $3,500 cap on subsidized loans.

PLUS Loans

Direct PLUS loans can be borrowed directly by a graduate student, or Parent PLUS loans can be taken out by an undergrad’s parents. PLUS loans, in both forms, have the same benefits as other federal loans in that the interest rate is fixed and there are flexible repayment options.

Unlike other federal loans, PLUS loans require a credit check. They’re designed for graduate and professional students, who have had more time to build up a credit score. The maximum PLUS loan amount you can borrow is the full cost of tuition less any other financial assistance.

When taking out student loans for college, a lot of the options depend on your FAFSA and what’s determined to be your family’s financial need or ability to pay. If you’re a dependent student , then there will likely be some expectation of parental contribution and your parents may be offered the option of taking out Parent PLUS loans.

Parent PLUS loans are similar to Direct PLUS loans, except parents are expected to begin repaying the loan while the student is still in school—though they can request a deferment until graduation.

Direct Consolidation Loans

After graduation, students might have a number of different federal student loans. That can obviously be confusing. If you want to consolidate all federal loans into one place, then you may be able to pool them into a Direct Consolidation Loan. This allows you to only make one monthly payment towards all your federal student loans.

A Direct Consolidation loan will not lower your overall interest rate.

A Direct Consolidation loan will not lower your overall interest rate. The interest rate on your new Direct Consolidation Loan is simply a weighted average of the interest rates, rounded up to the nearest eighth of a percent, of your existing federal loans. Consolidation could also wipe out any history of payments you were making toward PSLF. Only federal loans can be consolidated with a Direct Consolidation Loan.

Related: A Look Into the Public Service Loan Forgiveness Program

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Private Student Loans

Students who don’t receive enough funding from the federal government, may look to private student loans as an option to finance their education. Private loans are offered by lenders such as banks, online lenders, and credit unions.

Applying for Private Student Loans

Private lenders do not use the FAFSA to determine a potential borrower’s creditworthiness. Instead, students interested in borrowing private loans will fill out a loan application directly with a lender. Before applying, lenders will generally allow people to get a quote to see if they pre-qualify and at what rates. This can be helpful when evaluating different lenders.

The terms, interest rates, and borrowing limits on private loans may vary by lender. Lenders will use factors like the borrower’s credit score to determine the interest rate they qualify for. When borrowing a private student loan you’ll generally have the option to choose between a fixed or variable interest rate.

Student loan repayment options will be determined by your lender. Some offer deferment plans while the borrower is enrolled in school and others require payments to start as soon as the loan is disbursed.

Another private student loan option is to consolidate or refinance your existing student loans after graduation. This might be beneficial if it lowers your interest rate and saves you money over the life of your loan. Federal student loans offer unique borrower benefits and protections like income-driven repayment plans. Refinancing federal loans eliminates them from these benefits.

Understanding the Student Loan Statement

When you take out a loan, you sign a promissory note, which outlines the interest rate, loan amount, and repayment terms. If you hold federal student loans, when you graduate you select a repayment plan. If you don’t do anything, you’ll automatically be put on the Standard Repayment plan.

For most federal loans, the Standard Repayment plan is a set monthly payment for up to 10 years. There are a few other repayment plans to choose from, including four income-driven repayment plans. The different plans allow you to pay back your loan over different time periods. The longer the repayment term, the more you’ll pay in interest over the life of the loan.

When you look at your student loan statement, you’ll see each loan listed as the total loan amount, how much principal remains, how much interest has accrued since your last payment, your current interest rate, and how much your current monthly payment is—in addition to any fees, such as late fees, you might owe.

The Benefits of Refinancing Student Loans

It’s possible to consolidate both federal and private student loans into one new loan when you refinance your student loans with a private lender. If an applicant qualifies for a lower interest rate and a shorter term, it could reduce the amount of money paid in interest over the life of the loan.

Make sure to weigh the benefits that come with your federal loans against the value of refinancing. When you refinance federal loans they will no longer be eligible for federal borrower protections.

Some private lenders offer similar borrower protections. For example, borrowers who refinance with SoFi may qualify for Unemployment Protection. This can help eligible borrowers pause their loan payments if they unexpectedly lose their job through no fault of their own. To see what refinancing could mean for you, take a look at SoFi’s student loan refinancing calculator.

The Takeaway

The two main categories of student loans are private and federal. Federal loans are awarded to students based on information they provide in their FAFSA annually. Federal loans have a fixed interest rate and are eligible for a variety of repayment plans, as determined by the U.S. Department of Education.

Undergrads may qualify for unsubsidized or subsidized federal loans, depending on their financial need. Graduate students may qualify for unsubsidized loans or PLUS loans. Parents of undergraduates may also borrow Parent PLUS loans.

Private student loans are offered by private financial institutions. In order to borrow a private student loan, individuals will generally need to file an application with a lender. The lender will review factors like the applicant’s credit history, among others, in order to determine the terms they qualify for.

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SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL SEPTEMBER 1, 2022 DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third-Party Brand Mentions: No brands or products 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.
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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC), and by SoFi Lending Corp. NMLS #1121636 , a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law (License # 6054612) and by other states. For additional product-specific legal and licensing information, see SoFi.com/legal.


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3 Factors That Affect Student Loan Interest Rates

Student loan interest rates change on a regular basis and are determined by different factors. You may have student loans taken out in different years and/or from various lenders—each with a different interest rate. But why? Who makes these decisions and when were they made? Here’s an in-depth look at what goes into the determination of student loan interest rates.

How Did We Get Here?

Federal student aid programs are enacted and authorized by Congress. There have been a few different programs over the years, aimed at students with various financial needs and educational goals.

•  The first such program was the GI Bill, implemented in 1944 to assist veterans who had served during wartime. The idea behind the GI Bill was that the veterans needed a chance to catch up to their peers who did not have their lives interrupted by military service and had been able to go to college.

•  In 1958, spurred on by the Soviet launch of Sputnik, Congress enacted the National Defense Education Act (NDEA), which provided financial aid to students in certain fields of study. The NDEA provided low-cost loans for undergraduate students, with the opportunity for debt cancellation for students who became teachers after graduation. It also established graduate fellowships for students studying in fields with national security relevance, such as science, mathematics, and engineering. Scholarships or grants that were outright need based were not included in the NDEA, however.

•  The first sweeping legislation to offer educational financial aid came in the form of the Higher Education Act (HEA) of 1965. Title IV of the HEA focused on the needs of students who did not have the financial means to afford a college education, with the introduction of Educational Opportunity Grants. This section of the act also introduced College Work-Study and the Guaranteed Student Loan (GSL) program.

The HEA was reauthorized eight times during successive presidential administrations with changes each time, focusing on students with different educational and financial needs. The HEA and student financial aid programs that today’s system is centered around came about with the 1972 reauthorization of the act. Changes included:

•  Financial support to students in programs other than four-year baccalaureate programs: career and vocational programs, community colleges, and trade schools, as well as to students in part-time programs.

•  Educational Opportunity Grants, College Work-Study, and the GSL program were replaced by Basic Grants (renamed Pell Grants in 1978).

•  State Student Incentive Grants, which provided federal matching funds to states that enacted or expanded their own need-based programs, were introduced.

•  Sallie Mae (“Student Loan Marketing Association”) was established to administer funds in the GSL program.

Later reauthorizations of the HEA saw further changes to student financial aid programs.

•  Expansion of student financial aid to the middle class.

•  Widening eligibility for Pell Grants.

•  Availability of subsidized guaranteed loans to students regardless of income or financial need.

•  Introduction of an unsubsidized federal student loan option that doesn’t take financial need into account at all.

•  Increasing the borrowing limits for federal student loans.

•  Consolidation of the method used to calculate the expected family and student contribution to educational costs.

All of those various pieces of legislation introduced the concept of financial aid and programs that administered them. Some components of student financial aid, such as scholarships and grants, don’t have to be repaid, but student loans do have to be repaid—with interest.

3 Factors Affecting Your Student Loan Interest Rates

There are a lot of moving pieces in the puzzle that is higher education funding. And affording a college education can be quite puzzling to students and parents. If you’re considering applying for a federal or private student loan, there are a few main factors to learn about that might help you make a decision.

1. How Legislation Affects Student Loan Interest Rates

One of the main factors affecting federal student loans in general and, correspondingly, their interest rates is legislation. Rates set by private lenders are not governed by legislation.

Until 1979, banks’ rate of return for GSLs was capped by the rate set by a group of government officials. But that year, Congress passed an amendment to the HEA that assured banks a favorable rate of return on GSLs by tying their subsidies directly to changes in Treasury bill rates. Before this amendment, federal grants and work-study made up about 50% of student financial aid and federal student loans made up about 25%.

During the 1980s and 1990s, student loan volume skyrocketed and those percentages essentially flip-flopped—loans made up about 60% of student aid, and grants and work-study made up only about 35%. But the low Treasury rates of the 1960s and early 1970s, which the banks’ subsidies had been based on, rose dramatically from the late 1970s though the mid-1980s, and didn’t return to the early 1970s rates until 1992, and they didn’t stay there for long.

The Student Loan Reform Act of 1993 was introduced to address the problems student loan borrowers were having repaying those debts. The Act implemented flexible repayment plans and began phasing in the Federal Direct Student Loan program, which still exists today, to replace previous loan programs.

Prior to 2006, federal student loan interest rates were variable, based on the 91-day Treasury bill rate plus varying percentage rates depending on the type of loan, and were capped at 8.25% for Stafford Subsidized and Unsubsidized Loans, and 9% for PLUS Loans.

From 2006 to 2012, rates were fixed at 6.8% for Stafford Subsidized and Unsubsidized Loans, and 7.9% for Direct PLUS loans for graduate students and parents. During this time range, subsidized Stafford Loan interest rates were reduced incrementally based on the distribution date.

The 2013 passage of the Student Loan Certainty Act changed the way interest rates on federal student loans were calculated. This Act established the interest rate calculation as based on the 10-year Treasury bill rate. New rates are set every year on July 1, and are applied to loans disbursed from July 1 through June 30 of the following year. In other words, as prevailing interest rates change from year to year, so rates on newly disbursed Direct Loans do, too.

How Does This Affect Your Rates?

If you are a federal student loan borrower, your loan’s interest rate was set according to the calculation used when it was disbursed. Consolidation can be an option for some borrowers with multiple loans that have different interest rates. Any loans that have variable rates can be switched to a fixed interest rate through consolidation. There are pros and cons to consolidating loans, though, so it’s important to consider your financial situation before deciding if it’s the right option for you.

2. How the Type of Loan Affects Student Loan Interest Rates

The kind of student loan you have dictates the interest rate you’ll be charged.

•  For current undergraduate borrowers , there are two types of federal student loans available.

◦  Direct Subsidized Loans for student borrowers with financial need.

◦  Direct Unsubsidized Loans, which don’t have a financial need requirement.

◦  The applicant’s credit history is not a consideration for either of these types of loans.

•  Current graduate and professional borrowers also have two federal student loan options.

◦  Direct Unsubsidized Loans, which don’t have a financial need requirement.

◦  Direct PLUS Loans , which are commonly referred to as Grad PLUS Loans when taken out by graduate students.

▪  Federal Direct PLUS Loans do require a credit check to determine eligibility, but this does not affect the interest rate, as it is fixed by federal law.

•  Parents of dependent, undergraduate students have the option of borrowing under the federal Direct PLUS Loan Program.

◦  Like the Direct PLUS Loans, a credit check is required for qualification, but since the interest rate is fixed by federal law, the applicant’s credit history does not affect the interest rate.

For the 2022-2023 school year, the interest rate on Direct Subsidized or Unsubsidized loans for undergraduates is 4.99%, the rate on Direct Unsubsidized loans for graduate and professional students is 6.54%, and the rate on Direct PLUS loans for graduate students, professional students, and parents is 7.54%. The interest rates on federal student loans are fixed and are set annually by Congress.

Private student loans may be another option for some borrowers. After exhausting all federal student loan options, seeking out scholarships and grants, and using as much accumulated savings as you feel comfortable using, a private student loan can help fill in any gaps in educational funding that might be left. Here are some details about private student loans that might help you as you consider financial options:

•  Private student loans are administered by the lender, not the federal government.

•  The borrower’s credit score and credit history will be used to determine the interest rate they might qualify for.

•  Recent high school graduates may not be able to qualify on their own, so might need a cosigner.

•  Interest rates can be higher with private student loans than federal student loans.

A borrower might end up with a combination of several types of loans to repay and want to make that repayment as simple and financially feasible as possible. Federal student loans come with consolidation options and repayment plans that aren’t generally offered by private lenders. If there is a need to reduce your monthly student loan payment on federal student loans, it’s best to try all federal options—forbearance, deferment, or income-driven repayment—before looking at student loan refinancing options with a private lender.

How Does This Affect Your Rates?

Federal student loan interest rates are fixed by federal law, so your rate will only be affected by the date of disbursement. If you have more than one federal student loan, you will likely have different interest rates on each of them.

Private student loan interest rates are set by the lender. Some private lenders will offer the choice of a variable- or fixed-rate loan. A variable rate loan usually offers a lower initial interest rate than a fixed-rate student loan, but because the rate can fluctuate over time, it also presents a greater risk. If interest rates go up, so do your interest payments. A fixed rate loan’s interest will be the same amount each month, which can make it easier to budget.

3. How You Can Affect Your Student Loan Interest Rates

The choices and decisions you feel comfortable making will affect how much you pay for a student loan.

Opting for a federal student loan means your interest rate will be fixed for the term of the loan. Your personal credit history does not have an effect on the interest rate.

Opting for a private loan means your credit history will be taken into account when determining eligibility and the interest rate offered. This means that financial decisions you’ve made in the past will determine how much you pay for your student loan in the future.

Before applying or cosigning for a private student loan, reviewing your credit report is a good idea. If there are any errors, bring them to the attention of the credit bureau that the report is from.

Two factors that make up the majority of a person’s credit score are their payment history and the amount they owe to creditors.

•  Payment history accounts for 35% of a person’s FICO® Score, so on-time payment of debts is very important.

•  Amount owed accounts for 30% of the FICO Score, so using a low percentage of your total available credit will positively affect your credit score.

Auto-pay is an option that can reduce your student loan interest rate by a certain percentage. Federal loans offer this option, and some private lenders do, too. Check with your loan servicer to ask about auto-pay options.

If college graduation is but a fond memory, and your credit history is better established and more positive than it may have been in the past, you might consider negotiating your private student loan interest rate. There is no guarantee that the lender will agree to a lower rate, but it’s worth asking.

How Does This Impact Your Rates?

The bottom line with this factor is that you can choose the option that you think works best for your financial situation and personal comfort level. If you want the fixed-rate steadiness and other benefits that a federal student loan comes with, then choosing that may be right for you. If you’re comfortable with the potential of an interest rate increase with a variable-rate private student loan, then this is another option you may choose.

The Takeaway

For first-time borrowers, federal student loans can be the way to go—after all, most undergrads haven’t had time to build up a history of responsibly (or irresponsibly) using credit. However, graduate and professional school borrowers, or non-traditional student borrowers with clear financial pictures, may have more options than the one-size-fits-all approach. Remember, private student loans may not have the same protections and benefits that come with federal student loans and usually are not considered until all other financial aid options have been exhausted.

If a student loan fits your financial needs, consider looking at private student loan online options offered by SoFi. With undergraduate, graduate, professional, and parent student loans, SoFi Private Student Loans can be used at any point in a student’s college career. Borrowers pay no fees and have flexible repayment options.

See if there’s a SoFi Private Student Loan option that works for you.


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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 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 Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL SEPTEMBER 1, 2022 DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third-Party Brand Mentions: No brands or products 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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