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 borrowing a 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 4.99%, which means that you would be responsible for paying your lender 4.99% of the amount of money you borrowed in yearly interest.
That 4.99%, 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.
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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 July 2022, APRs on private student loans may vary from around 3% to upwards of 14% 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 are looking for a private student loan, know that lenders are required to publish APR so that you can compare loans from different lenders. SoFi private student loans have competitive interest rates for qualifying borrowers and there are zero fees.
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 2022-2023 school year the interest rate on Direct Subsidized and Unsubsidized loans is 4.99% 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 July 2022, interest rates on fixed private student loans hovered around 3% to upwards of 14%
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