There are several factors you need to consider to find the best student loan option for you. The three top things to look at are the loan type, interest rate of the loan, and the APR. Regarding loan type, there are two to choose from – federal and private student loans. When it comes to interest rate, you want to look for the lowest rate you can get. The big question then is what is APR for loans and why does it matter?
Here’s what you need to know about APR for student loans and how APR is different from interest rate.
What Is APR For Student Loans?
APR stands for Annual Percentage Rate. It refers to the percentage of interest you will pay on a loan per year and is an important factor to consider when taking out a student loan.
The APR on your student loan represents the actual total cost of borrowing money over a year. It considers the interest rate as well as any additional fees associated with the loan.
Calculating the APR helps you compare different loan offers and get a real picture of the overall cost you will pay for borrowing money for your education. A lower APR means you’ll pay less money over time even if the interest rate of the loan is slightly higher.
Before accepting a federal or private loan to pay for college, you should compare not just the interest rate of the loan but its APR as well. The APR for a loan will be included in the offer before you accept. It’s important that you don’t overlook this crucial number.
APR vs. Interest Rate on Student Loans
APR and interest rate are both equally important terms to understand when you’re calculating the cost of student loans.
The interest rate is the percentage of the loan amount that you will pay as interest over time. It’s a straightforward number that most lenders publish upfront on their website.
On the other hand, APR takes into account the interest rate as well as any additional fees or costs that the lender may charge, such as origination fees. These fees add to the total cost of the loan.
While the interest rate focuses solely on the cost of borrowing the money, the APR gives you a more comprehensive picture of the total cost of the loan. Calculating only the interest rate and ignoring the APR will give you a lower cost of borrowing, which is incorrect. When comparing different loan offers, it’s important to consider both, the interest rate and the APR to understand the true cost of borrowing.
You should know that not all lenders charge additional fees when processing student loans. If no fees are added to your loan amount, the interest rate and the APR will be the same.
How To Calculate APR On Student Loans
Calculating the APR on student loans is slightly more complex than calculating the interest rate. To explain the calculation, let’s take two scenarios – one where there are no additional fees and one where the lender adds on an origination fee.
Scenario 1:
Let’s say you’re borrowing $100 with a fixed interest rate of 5% for a one-year term. The lender is not adding on any additional fees.
Interest for one year = loan amount x interest rate.
In this case it would be $100 x 0.05 (5% interest rate) = $5 interest for one year.
Since there are no additional fees, the APR in this case would be the same as the interest rate, which is 5%. This means that the total cost of borrowing $100 for one year, including the interest, is $105.
Scenario 2:
Let’s consider you’re borrowing $100 with a fixed interest rate of 5% for a one-year term. In this case, there’s an additional fee of $10 associated with the loan.
To calculate the APR, we need to consider both the interest rate and the additional fee into the total cost of borrowing.
You need to first calculate the interest on the loan amount. That would be $100 x 0.05 = $5.
Next, add the additional fee to the total cost: $5 (interest) + $10 (additional fee) = $15.
To calculate the APR, divide the total cost ($15) by the loan amount ($100), and multiply the result by 100 to express it as a percentage:
($15 / $100) x 100 = 15%.
In this scenario, the APR would be 15%. This means that the total cost of borrowing $100 for one year, including both the interest and the additional fee, amounts to $115.
Note: These are simplified examples. In real life scenarios, APR calculations can be more complex, involving different types of fees and varying loan terms.
Here’s a look at the current interest rates on the different types of student loans.
Current Interest Rates for Direct Subsidized Federal Student Loans
Subsidized loans generally have lower interest rates than most other types of student loans. These loans from the federal government do not begin to accrue interest until after you have graduated or left college.
For undergraduates, the interest rates for Direct Subsidized loans disbursed on or after July 1, 2023, and before July 1, 2024, is 5.5%. After July 1, 2024, this rate may change for new and future loans, but it will be fixed for the life of any loan accepted between July 1, 2023, and July 1, 2024.
You can apply for a direct subsidized loan by completing the FASFA and CSS. You will need to show financial need to get the benefit of this low-cost loan.
Current Interest Rates for Direct Unsubsidized Federal Loans
Like direct subsidized loans, you need to complete the FAFSA to apply for unsubsidized federal loans too. However, while you do not need to prove financial need, interest will begin to accumulate immediately and will build upon the principal amount of the loan. This makes knowing your APR even more important for unsubsidized loans.
For undergraduates, the interest rates for Direct Unsubsidized loans disbursed on or after July 1, 2023, and before July 1, 2024, is 5.5%. Although the interest rate is the same as that of subsidized loans, unsubsidized loans end up costing much more because interest starts accruing from the time the funds are disbursed.
For graduate and professional students, the interest rates for Direct Unsubsidized loans disbursed on or after July 1, 2023, and before July 1, 2024, is 7.05%
Current Rates for Direct PLUS Loans
Another federal loan your family may take out is the Direct PLUS loans. These are only granted to parents, graduate students, and professional students.
Direct PLUS loans are among the most expensive types of federal student loan. The interest rate for PLUS loans disbursed on or after July 1, 2023, and before July 1, 2024, is 8.05%.
Current Rates for Private Loans
If federal loans aren’t enough to cover the cost of college, you can choose to take a private loan. You may need co-signer to apply for a private student loan if you don’t have the necessary credit to qualify on your own. The APR offered is set by the institution, usually a bank or credit union.
Interest rates for private loans will vary from applicant to applicant, depending on your and your cosigner’s credit score, income, and other factors. You can also choose from variable and fixed rates.
Before accepting a student loan, whether federal or private, it’s extremely important to look beyond the principal loan amount. Knowing how much you will owe at the end of your four years or more at college will help make it clear whether taking the offered loan and APR is worth it to your family and future self. It may even help you set a budget to pay off your student loans, starting from day one.
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| Lender | Rates (APR) | Eligibility | |
|---|---|---|---|
 |
5.50%-16.12%* Variable
3.99%-15.61%* Fixed
|
Undergraduate and Graduate
|
VISIT CITIZENS |
 |
5.54% - 15.70% Variable
3.99% - 15.49% Fixed
|
Undergraduate and Graduate
|
VISIT SALLIE MAE |
 |
4.63% - 17.99% Variable
3.49% - 17.99% Fixed
|
Undergraduate and Graduate
|
VISIT CREDIBLE |
 |
6.00% - 13.75% Variable
3.99% - 13.75% Fixed
|
Undergraduate and Graduate
|
VISIT LENDKEY |
 |
5.66% - 14.72% Variable
3.69% - 14.56% Fixed
|
Undergraduate and Graduate
|
VISIT ASCENT |
 |
3.70% - 8.75% Fixed
|
Undergraduate and Graduate
|
VISIT ISL |
 |
5.62% - 16.85% Variable
3.69% - 16.49% Fixed
|
Undergraduate and Graduate
|
VISIT EARNEST |
|
|
5.00% - 14.22% Variable
3.69% - 14.22% Fixed
|
Undergraduate and Graduate
|
VISIT ELFI |
