How Does Student Loan Interest Work? A Complete Guide

Student loan interest determines how much borrowers repay. Learn how student loan interest rates work, how to calculate interest, and how to get lower rates.

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by Genevieve Carlton, Ph.D.

Published on January 28, 2022 · Updated on February 11, 2022

Reviewed by Mary Louis

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How Does Student Loan Interest Work? A Complete Guide


In 2021, student loan debt hit an all-time high of $1.75 trillion. On average, each of the 43.2 million student borrowers in the U.S. owes about $39,350. But how does student loan interest factor into those numbers?

Student loan interest — the percentage you pay to borrow money — can easily add thousands of dollars to the overall amount borrowers repay. In some cases, borrowers pay more in interest than the amount they originally borrowed.

Understanding student loan interest can ultimately save you money. So how does student loan interest work? Why do interest rates matter? And how can you lower your own interest rate?

How Does Student Loan Interest Work?

First off, what is student loan interest? Student loan interest is the amount borrowers pay on top of the loan amount, or principal. Essentially, interest is a fee lenders charge you to borrow money.

For student loans, interest accumulates daily from when the borrower takes out the loan. Most loans, including federal loans, use a fixed interest rate, which stays the same as borrowers repay the loan. Some private lenders offer variable interest rates, which rise and fall over time.

Current student loan interest rates depend on the loan and borrower. In general, though, federal student loans offer lower interest rates than private student loans.

How Do Private vs. Federal Student Loan Interest Rates Compare?

The federal government sets interest rates for federal student loans. The rate varies depending on the type of loan and the type of student, such as whether you're an undergraduate or graduate student.

For example, Direct Subsidized and Unsubsidized Loans charge the lowest interest rates. In academic year 2021-22, undergraduates qualify for a 3.73% interest rate for both of these loans. Graduate and professional students can only take out Direct Unsubsidized Loans and will pay a higher 5.28% interest rate.

Direct PLUS Loans — available to graduate students, professional students, and parents and guardians of undergraduates — currently come with a 6.28% interest rate. In contrast, private loans typically charge higher rates. Most private student loan interest rates hover around 6-7%, with some rates as high as 13%.

Borrowers should keep in mind that interest rates can change each academic year.

Student Loan Interest Rates, 2021-22*
Type of Loan Borrowers Interest Rate
Direct Subsidized and Unsubsidized Loans Undergraduates 3.73%
Direct Unsubsidized Loans Graduate and professional students 5.28%
Direct PLUS Loans Graduate students, professional students, and parents/guardians of undergraduates 6.28%
Private Loans All Up to 13%

*Interest rates are for loans first disbursed on or after July 1, 2021, and before July 1, 2022, for federal direct loans.

Why Your Student Loan Interest Rate Matters

Understanding the difference between low and high student loan interest rates could save you tens of thousands of dollars over the life of repaying a loan.

Take a $10,000 student loan with a 3.73% interest rate. Paying back the loan over 10 years will cost you just around $2,000 in interest. Now, compare that with a $10,000 loan with a 10% interest rate. After a decade of payments, you'd end up paying $5,860 in interest — more than half the value of the original loan.

These numbers only increase for larger loans. On average, today's undergrads owe around $36,000 by the time they graduate.

Even at a low 3.73% interest rate, borrowers can expect to pay an extra $7,200 in interest on a $36,000 loan over 10 years. And at a higher 6.28% interest rate for PLUS loans, you'd pay $12,570 in interest. A private loan for this amount with a 10% interest rate, meanwhile, adds up to over $21,000 in total interest.

The amount you pay in interest can also rise if you pay off your student loans over a longer period of time. Many consolidated loans let borrowers take up to 30 years to repay.

A $36,000 loan at a 3.73% interest rate will rack up nearly $24,000 in interest over 30 years. A 6.28% rate will cost you $44,000 in interest. And a 10% interest rate means a whopping $77,700 in interest — all on a $36,000 principal loan.

Locking in a low student loan interest rate — or lowering your current rate — can save you thousands of dollars in the long run.

How to Calculate Student Loan Interest: 3-Step Guide

Interest accrues every day on student loans. But how can you calculate student loan interest?

The easiest way to do this is to use a student loan calculator. With this tool, you'll simply enter the loan amount, interest rate, and repayment period to see how much interest you'll owe at various interest rates.

You can also calculate student loan interest on your own with the steps below.

Step 1: Determine Your Daily Interest Rate

First, calculate the interest owed each day by dividing the annual interest rate by 365. For example, with a 5% interest rate, this comes out to 0.000137 (0.05 divided by 365), or 0.0137% per day.

Step 2: Calculate How Much Interest You Owe Each Day

Next, multiply the daily interest rate found in Step 1 by the total remaining amount of your loan.

For $10,000 borrowed at a 5% interest rate, you'd multiply $10,000 by 0.000137, i.e., your daily interest rate. This comes out to $1.37 in student loan interest each day.

Step 3: Find the Interest Owed on Each Payment

The last step is to multiply your daily interest amount calculated in Step 2 by 30. This will show you how much interest you'll pay each month when your student loan payment is due. For the $10,000 loan example above, you'd multiply $1.37 by 30 to get $41.10 in interest for your monthly payment.

Knowing the daily interest helps, but you also want to know how much you'll pay over the life of the loan. That's where loan payment calculators can help. For that same $10,000 loan with 5% interest, you'd pay about $2,730 in interest over a 10-year repayment period.

What Factors Affect Student Loan Interest Rate Calculations?

Why can't you just multiply the monthly interest by the total number of payments to find out the total interest? As you pay down the principal, the interest owed drops. Some private lenders use compound interest, which can also throw off these calculations.

With compound interest, the interest that accumulates each day gets added to the principal until your monthly payment, which means you end up paying more in interest.

Keep in mind that lenders apply your monthly payment to interest first. In practice, that means that on a $10,000 loan with a 5% interest rate, your monthly payment would come out to around $106. For that first payment, $41 would go toward interest and $65 toward the principal.

In other words, it takes a long time to pay down your principal, so sending in even a little bit extra each month to apply directly toward the principal can help you pay off your student loan faster and pay less in interest in the long run.

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6 Tips for Lowering Your Student Loan Interest Rates

With a high student loan interest rate, you might end up paying more in interest than the original loan. So how can you lower your interest rates, even after taking out loans?

1. Prioritize Federal Student Loans

Federal student loans typically offer lower interest rates than private loans, particularly for undergraduates. For example, federal Direct Subsidized and Unsubsidized Loans come with a 3.73% interest rate for undergraduates compared with a 6-7% interest rate for private loans.

In addition to a lower interest rate, federal loans offer several benefits that private loans do not. With Direct Subsidized Loans, for instance, the federal government pays the interest while borrowers attend school and during any grace periods or deferments.

2. Compare Interest Rates Before You Take Out Loans

College students reviewing their financial aid offers might not pay close attention to the interest rates for different loans. But comparing interest rates can mean locking in a lower rate.

For example, borrowers should prioritize Subsidized Loans over Unsubsidized Loans, and Unsubsidized Loans over PLUS Loans. Aim to max out your lower-interest rate options before taking out loans with higher interest rates.

What about interest-free student loans? While not interest-free, Direct Subsidized Loans come the closest, since students pay no interest while in school.

3. Consider Getting a Co-Signer

Taking out loans with a co-signer can mean lower interest rates.

Federal student loans offer a fixed interest rate that doesn't change based on your credit score. As a result, borrowers don't need a co-signer. But if you've maxed out your federal loans or don't qualify for any, you might consider getting a co-signer for private loans.

When private lenders calculate interest rates, they use the borrower's credit score. Many college students have a short credit history and thus a lower credit score. Co-signing on a loan with someone with a strong credit score can result in a lower interest rate.

Just know that co-signers also take on risk by agreeing to repay the loan if you, the borrower, do not.

4. Sign Up for Autopay

Many loan providers offer a discount if you sign up for automatic monthly payments. For example, federal student loans qualify for a 0.25% interest rate reduction with autopay.

That might not sound like a lot, but every fraction of a percent counts. Consider a $36,000 loan at 3.73% interest, repaid over 30 years. That 0.25% discount would save you around $1,800.

5. Refinance Your Loans to Lower Interest Rates

Borrowers can refinance their loans to potentially lock in lower interest rates.

Refinancing makes sense in several circumstances. If you took out loans with a bad credit score but later improved your credit, your lender might offer a lower rate. Similarly, if interest rates drop, lenders may refinance at a lower rate.

There's one big caveat, however: Federal student loans do not qualify for refinancing. And since federal student loans account for around 92% of all student loans, refinancing will only work for a small fraction of borrowers.

Even though federal student loans do not qualify for refinancing, students may be able to consolidate multiple federal loans into one fixed rate.

6. Negotiate Lower Interest Rates

If you have a student loan through a private lender, you may be able to negotiate a lower rate without refinancing, particularly if your credit score has improved since you took out the loan. Borrowers can try to find a lower rate offered by another private lender and present it to your current lender to see if they'd be willing to match the lower rate.

Frequently Asked Questions About Student Loan Interest Rates

true What is the average student loan interest rate?

The average student loan interest rate for all borrowers is around 5.8%; however, that number varies depending on the lender and when you borrowed the money.

The federal student loan interest rate is currently at a historic low. In 2006, undergraduate borrowers paid 6.8% interest. Today, that percentage is 3.73% for Direct Subsidized Loans, which boast the lowest student loan interest rates.

Private student loan interest rates typically exceed federal rates. Borrowers pay an average interest rate of 6-7% on private loans, with some interest rates climbing as high as 13%.

true What is a good student loan interest rate?

For undergraduates, the Direct Subsidized and Unsubsidized Loan interest rate of 3.73% is one of the lowest interest rates you can get. Even better, Direct Subsidized Loans are interest-free while borrowers attend school.

Any interest rate below the average student loan interest rate of 5.8% represents a good rate. That said, even a good interest rate can mean paying thousands in interest over the lifetime of that loan. As a result, borrowers should make sure to check interest rates, repayment terms, and the total interest owed when evaluating their financial aid options.

Limiting loans as much as possible can save students a lot of money in the long term.

true How do student loan interest tax deductions work?

Borrowers can deduct their student loan interest on their taxes. But how does the student loan interest deduction work? As the IRS explains, taxpayers can deduct up to $2,500 in student loan interest each year on their taxes.

However, the deduction comes with some qualifications. Dependents cannot claim the tax deduction, nor can those who exceed a certain income threshold. Please speak with an accountant, tax attorney, enrolled agent, or certified tax professional to verify what tax deductions you can claim.

Your lender will provide a tax document regarding the interest you paid. If you have paid interest and have not received a tax document from your lender, reach out to your lender for more information.

DISCLAIMER: The information provided on this website does not, and is not intended to, constitute professional financial advice; instead, all information, content, and materials available on this site are for general informational purposes only. Readers of this website should contact a professional advisor before making decisions about financial issues.


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