6 Things You Need to Know about Student Loan Interest Rates

If you're like most college students, student loans will likely be part of your college financing plan. Here's what you need to know about student loan interest rates and how it will affect your debt after college.

Jul 13, 2014 at 9:21AM

In 2012, 1.3 million students graduated with student loan debt, according to the Institute for College Access and Success. In other words, if you're like most college students, student loans will likely be part of your college financing plan. "Look at a student loan as an investment. Just remember that the loan payment will be waiting for you after you graduate," says Dean Obenauer, Assistant Director of Financial Aid for Financial Literacy at Creighton University.

What sometimes trips up students, says Obenauer, is not taking into account how much they'll end up having to pay back once student loan interest is tacked on to the amount borrowed. Take a look at some of the ins and outs of student loan interest rates so you can make informed decisions about financing your education.

Does the Student Loan Interest Rate Fluctuate?
Beginning this July, federal student loan rates will be tied to financial markets, as noted in the Bipartisan Student Loan Certainty Act of 2013. Interest rates for new loans taken out in the upcoming award year, which starts on July 1 and ends on the following June 30, will be determined based on market rates. Whatever your starting rate is will remain fixed for the entire life of your loan.

The rate for federal direct loans -- both subsidized and unsubsidized -- for undergraduate students is currently 3.86 percent. For the upcoming 2014-2015 academic year, interest rates will be increasing to 4.66 percent. PLUS loans, graduate school loans, and other loan programs have their own rates, so be sure to check the Federal Student Aid site if those apply to you.

So What Happens If I Get My Loan the Year That the Student Loan Interest Rates Skyrocket?
The good news is there is a maximum interest cap, so even if the economy takes off, the highest rate to which student loan interest rates can climb is 8.5 percent for undergraduates, Obenauer explains. Because many young adults are struggling to pay back their loans right now, there's actually been some proposed legislation by New York Senator Chuck Schumer and others to allow current borrowers to refinance to today's lower rate. Stay tuned for that; if this legislation passes, you could have some options for reducing your rate down the line.

When Does Interest Begin Accruing?
Your first student loan payment isn't due until six months after leaving school. While subsidized loans do not accrue any interest while you're in school, unsubsidized loan interest starts accruing from the day the loan is disbursed. "The interest rate clock starts ticking," says Obenauer. "Students with unsubsidized loans should try to make a payment every now and then while they are in school to keep on top of interest that is accumulating."

How Can I Pay Less Interest?
There is a small incentive -- a quarter of a percent interest reduction -- if you sign up to have automatic monthly payments taken from checking or savings, says Obenauer. But the simplest way to pay less interest is to pay off the loan as quickly as possible. "Just because the loan servicer will set you up on a minimum monthly payment over a 10-year plan, or a 25-year plan, you'll pay so much more for your loan the longer you take to pay it," he says. There's no penalty to pay off the loan early, so try to send more than the minimum payment as often as you can, he adds.

Once the Interest Rate Is Set, How Much Will My Monthly Payment Be?
Obenauer recommends taking advantage of the calculator tools on the StudentAid.gov website, as well as those on Finaid.org. "You can do a calculation to find out your estimated monthly payment, and see how the total amount paid will vary for different repayment periods," he says. You can also see how high your payments will need to be if you want to pay them off within a certain period of time.

All in all, the federal student loan program offers a comparatively low interest rate and a variety of repayment options, making it a good deal for students who qualify. Private loans can help fill in the gaps, too. Obenauer advises students to borrow both federal and private loans responsibly. "Only borrow as much as you truly need."

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This article, "6 Things You Need to Know about Student Loan Interest Rates" originally appeared on Online Colleges.

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