Student Loans: Interest Rates

Pay attention to the power of student loan interest rates

The interest rate you'll pay on various college loan options represents one of the single largest factors—if not the largest factor—when it comes time to select the right mix of student loans to help you pay for your post-secondary education.

The power of student loan interest rates is also a major reason why you should first exhaust your options for federal student loans. Federal loans generally come with lower interest rates than those available through banks or credit unions, due to government subsidies. College loan interest rates vary, and they fluctuate with the economy. But subsidized federal loans can come with interest rates several percentage points lower than those offered by private lenders.

Over time, the accrued interest you'll have to pay on the loan can represent even more than the original amount you borrowed. The longer your repayment period is, the more interest you will accumulate.

There are two broad types of interest rates—fixed and variable. As the words imply, fixed rates do not fluctuate, but remain stable for the life of the loan. Variable rates fluctuate based on the broader economy and Federal Reserve policies. The new rates for federal loans are instituted on July 1st of each year. Consequently, private loan rates can adjust monthly or quarterly throughout the year.

Pay attention to the APR

One effective way of making valid apples-to-apples comparisons between competing loans is to check the APR (annual percentage rate) of the loan. All other things being equal, you'll want the lowest possible APR you can get.

An example of how student loan interest works

You'll find a host of calculators and other tools online that will help you calculate what you would owe each month on various loans under various repayment plans, based on the student loan interest rate and repayment period of the loan. But here's one example of how interest rates work in the context of student loans.

To determine the amount of interest you'd be required to pay each month, you can use the following formula (remember that interest accrues daily on most student loans):

Number of days since your last payment
Principal balance still outstanding
Interest rate factor
Interest amount

Practice Example: For the sake of argument, let's pretend the remaining balance on your loan is $9,500.00. Thirty-two days after your last payment, you sent in a payment of $160.00. Your interest rate is 8.25%, giving you an interest rate factor of .00022587.

The calculation: 32 days times $9,500.00 (principle balance outstanding) times .00022587 (the interest rate factor) means you would pay $68.66 toward interest and $91.34 toward the principal balance, under this example. This would leave you with a loan balance of $9,408.66.

Now that you understand about student loan interest rates and APR, learn about what private student loan money can be spent on.

Learn more about our affordable Citizens Bank Citizens Bank Student Loan™

You can find helpful information about our affordable Citizens Bank Citizens Bank Student Loan™. If you still have questions, call a student loan specialist at 1-800-708-6684, and we'll help walk you through the process.

Additional student loan and college planning resources

APR 101: What Does APR Mean?
What Should You Ask Your Financial Aid Advisor
Financial Aid 101
What Can I Expect After My Financing is in Place?
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