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.
Related: Pros & cons of paying off student loans early
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
Except for 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.
1. Unsubsidized Student Loans
Federal Direct Unsubsidized Loans are available to undergraduate and graduate students with no regard to financial need.
- Rate and loan fee: 3.73% for undergraduates and 5.28% for graduate students, with a loan fee of 1.057%.
- Grace period: While you’re in school at least half-time and for six months after graduation.
2. Subsidized Student Loans
Federal Direct Subsidized Loans are available to undergraduates with financial needs.
- Rate and fee: 3.73%, with a loan fee of 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 any deferment.
Direct PLUS Loans
1. Taken Out by a Parent
A Parent PLUS Loan acquired to help a dependent undergraduate is unsubsidized.
- Rate and fee: 6.28%, with a loan fee of 4.228%. In the past decade, the rate for Direct PLUS Loans has been as high as 7.90%. 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.
2. Taken Out by a Graduate Student or Professional Student
Grad PLUS Loans are available to students through schools participating in the Direct Loan Program.
- Rate and fee: 6.28%, with a loan fee of 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. 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.
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.
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. 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.
Learn more:
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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 THE END OF JANUARY 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.
More from MediaFeed:
6 strategies to pay off student loans quickly
Life can get expensive. When you factor in things like rent or mortgage, groceries, child care expenses, transportation costs, and more, it adds up quickly. For 45 million Americans, their monthly budget also includes student loan payments.
If you’re trying to figure out how to pay off student debt faster, read on for help.
If you’re able to lower or eliminate student loan debt, you’ll have more money to save for a down payment or for retirement. Consider this: College graduates turning 30 who have student loans have significantly lower retirement assets than those without student loans, according to a study by the Center for Retirement Research at Boston College.
So what’s the fastest way to pay off student loans? There’s no one right answer, but these tips could help you hasten repayment so you can focus on other financial goals.
Related: Do
student loans count as income?
kate_sept2004/istockphoto
One of the most effective ways to possibly get ahead of student loan debt is to pay more than the monthly minimum. There are no prepayment penalties for federal or private student loans, so it might be one of the fastest ways to shrink your debt.
As a bonus, when you put extra money toward the principal loan balance, you’re also shaving off the total cost of interest you may otherwise pay over the life of the loan.
You might be surprised how much an additional monthly $50 payment can trim off your debt. If your monthly budgets are too tight to make an additional monthly contribution, you might consider increasing your payments every other month or quarterly.
To make the most of prepayments, the additional payments should be applied to the loan’s principal. Some loan servicers may apply a payment to the next month’s payment instead of deducting it from the loan balance. You may want to contact your loan servicer to make sure prepayments are applied to the principal.
DO NOT USE
If making monthly prepayments to your student loans is out of the question, consider making a lump sum payment. That means making use of “found money.” Instead of treating a tax refund, financial gifts, bonuses, or a raise at work like “fun money,” you could use it to double down on your debt, or apply just half of the windfall.
It may also be a good time to review your spending habits and see where you might be able to find some extra cash. Even minor adjustments like taking public transportation instead of a cab or finding street parking instead of paying at a garage could add up.
When you find areas in your spending to cut back, consider adding that money to an account dedicated to your student loan repayments.
DepositPhotos.com
If you’re still searching for how to pay off student debt faster, you could try finding an additional source of income and putting that money toward debt.
What are your skills, hobbies, and interests? While it may take perseverance to find the right side hustle
https://www.sofi.com/blog/launching-side-hustle/
, it could wind up being one of the fastest ways to pay off student loans.
There are tons of apps that offer flexible, part-time side hustles. If you’re crafty, you could try selling your creations at an online marketplace. If you’re a photographer, writer, or editor, you could try finding a freelance gig. Once you get your side hustle going, the additional income could be regularly put toward extra student loan payments.
depositphotos.com
You could speed up loan repayment if you can find a way to have someone else contribute.
Deposit Photos
Before the coronavirus pandemic, an estimated 8% of employers offered student loan repayment assistance as a benefit. The CARES Act of 2020 gave companies an incentive to offer the benefit, which was then extended through 2025.
Employers can contribute up to $5,250 per employee each year toward qualified education expenses like student loan assistance without raising the worker’s gross taxable income.
mphillips007/istockphoto
Some volunteer opportunities might ease your student loan balance. For example, members of the Shared Harvest Fund can get a stipend applied to their student loans if they match up with a nonprofit organization that needs their talents.
You can choose the cause you like or filter by project. So, for instance, if you’re a lawyer, you can consult with a nonprofit organization looking to change its structure. A social media whiz can help set strategy for a therapy-pet agency.
yacobchuk / istockphoto
Your family members and friends want you to succeed, so why not ask them to contribute to your student loan instead of buying something you don’t really need on your birthday? One site, giftofcollege.com, lets you set up a profile, link to a student loan, and ask for contributions via social media.
DepositPhotos.com
When it comes to finding the fastest way to pay off student loans, you could try using the debt snowball method. Here’s how that works.
First, take a look at your loans, disregarding the interest rates, focusing on the balances instead. While you should be making at least the minimum monthly payment on all your loans, the debt snowball method has you put any additional money toward the loan with the smallest balance first.
Once that loan is paid off, you’d use the money you were paying on the old loan payment amount and roll it to the next smallest debt. The idea is to continue using this method until all of your loans are paid off. Each time you pay off a loan, it feels like a win that helps you see the progress you’re making.
istockphoto/demaerre
Refinancing your student loans with a private lender means taking out a new loan that pays off your existing loans and has a new interest rate, term, and monthly payment.
Depending on your credit score and income (among other factors), you may be able to secure a lower interest rate when you refinance your loans, which means the loan may accrue less interest over time (depending on the loan’s term). Lenders generally offer both fixed-rate and variable-rate loans, and often give you the option to extend or shorten your repayment term.
fizkes/istockphoto
If you have exclusively federal student loans, you could consolidate them into a Direct Consolidation Loan, with one monthly payment. The new, fixed interest rate will be the weighted average of your existing interest rates rounded up to the nearest eighth of a percentage point.
Consolidation can lower your monthly payment by giving you up to 30 years to repay your loans, but a longer term means more payments and more interest.
Before refinancing federal student loans, it’s best to weigh the borrower protections of those loans against refinancing with a private lender, who can’t offer the same federal benefits. For example, if you are enrolled in an income-driven repayment plan or are applying for Public Service Loan Forgiveness, refinancing might not be your best option.
But if you are enrolled in a standard repayment plan, refinancing could be an option.
Kerkez / istockphoto
How to pay off student loans quickly? There are a few strategies to explore. One or more of these six suggestions could be the ticket to chipping away at the debt faster.
Learn more:
This article
originally appeared on SoFi.comand was
syndicated by MediaFeed.org
https://mediafeed.org/
.
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 THE END OF SEPTEMBER 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.
SoFi’s Relay tool offers users the ability to connect both in-house accounts and external accounts using Plaid, Inc’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score provided to you is a Vantage Score® based on TransUnion™ (the “Processing Agent”) data.
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 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.
Moussa81/ istockphoto
Featured Image Credit: Depositphotos.
