Congress sets federal student loan interest rates each year and they remain fixed for the life of the loan. They are calculated using 10 year Treasury notes plus a margin.
This formula works for undergraduate loans, graduate student loans and parent PLUS loans. In addition to the interest rate, there’s a fixed buffer of extra interest that covers deferrals, forbearance or defaults.
Interest Rates
Interest on student loans can add up quickly. Fortunately, you have the power to reduce your rates.
Congress sets federal student loan interest rates annually, and they are determined by different formulas depending on the type of loan you have. Direct Subsidized and Unsubsidized Loans typically carry lower rates while PLUS Loans cost more.
In addition to interest rates, you will also have to pay loan fees. These are charged as a percentage of your loan amount and deducted from any funds received.
Federal student loan interest rates are determined by the 10-year Treasury note and Congress caps them for different loan types. On average, federal student loan interest rates range between 4.53% for undergraduate students and 6.08% to 7.08% for graduate and professional students.
Fees
Federal student loans often feature lower interest rates than private student loan options, making them attractive to parents and graduate students. Unfortunately, federal student loans also come with fees which could add up over time.
When applying for a federal student loan, the government charges an origination fee – an amount deducted from your loan before it’s disbursed to your school. At present, this fee stands at 1.057% for undergraduate and graduate students as well as 4.228% for parents borrowing federal parent PLUS loans.
Though a fee may seem inconsequential, it can accumulate over time and reduce the total amount of money you receive. It’s essential to understand what these fees are and how they work so that you can be an informed borrower. Other fees to watch out for include late payment and returned payment fees which can accumulate quickly, costing hundreds of dollars over the life of your loan.
Term
Federal student loans offer fixed interest rates, meaning your rate won’t change during the loan term. On the other hand, some private lenders provide variable rates that fluctuate based on market conditions and their costs.
Variable rate mortgages (VRBs) can fluctuate monthly, quarterly or annually and may also be reset at specified intervals.
There are various repayment plans for federal student loans, such as standard and graduated installments. You can select the option that best fits your budget and financial situation.
As a recent graduate, you have six months to wait before beginning payments on your federal student loan. Furthermore, you are allowed to defer making the first payment until you secure employment that pays enough to cover the full amount owed.
Borrowers can elect for the income-based repayment plan, which makes your monthly payment 10% of discretionary income and does not exceed 20% of what would normally be due under a standard repayment plan. You also have other repayment options like Revised Pay As You Earn (REPAYE), which begins with lower payments but gradually increases them according to your income.
Repayment
When it comes to student loan repayment, there are various options. The federal government offers several different repayment plans such as the standard one which should be suitable for most people.
Income-driven repayment plans are also increasingly popular. These four plans take into account your annual income and family size when calculating your payment amount.
Income-driven plans offer monthly payments as low as $0, which is great news for many borrowers. However, keep in mind that any remaining balance will be taxed according to current IRS rules.
You have the option of choosing a graduated or extended repayment plan, which starts with smaller payments and gradually increases over 10 years until your loan is paid off. These options may be beneficial to federal borrowers who struggle to make their standard monthly payments; however, bear in mind that these will cost you more in interest over time. So be sure to compare the costs before making any decisions.
