Interest Rate Information
Interest rates on loans come in different versions and sizes. It is important to consider all aspects of loan interest as you are accepting loan terms and signing promissory notes.
FEDERAL STAFFORD RATES
Federal Stafford Loans are student loans with their interest rate set by federal law and regulations. Stafford Loans carry the same rate structure regardless of lender. However, lenders may offer small savings through borrower benefits.
Stafford Loans come in both subsidized and unsubsidized versions. Subsidized means that the government is subsidizing (paying) the interest while the student is enrolled or in a grace period. They are not interest-free loans but are not accumulating interest during defined periods.
Unsubsidized Stafford Loans are collecting interest from the point of disbursement. Interest-only payments can be made to reduce compounding, the process of accumulated interest onto the principal of the loan and paying interest-on-interest later.
The interest rate for your Stafford Loan is determined by the time when it was disbursed. Therefore, the loan you take out for one academic year may have a different interest rate from the loan you take out the following year.
Most students are dealing with Stafford Loans first disbursed beginning July 1, 2008. Rates are as follows for these loans:
- Subsidized Stafford Loans for undergraduate students have a declining, fixed interest rate.
- July 2008 to June 2009: 6.0%
- July 2009 to June 2010: 5.6%
- July 2010 to June 2011: 4.5%
- July 2011 to June 2012: 3.4%
- July 2012 forward: 6.8% unless further action by Congress
- Subsidized Stafford Loans for graduate and professional students as well as all Unsubsidized Stafford Loans have a fixed rate of 6.8%.
Stafford Loans previously assumed from July 2006 to June 2008 have a 6.8% fixed rate. Those taken between July 1998 and June 2006 have a variable interest rate reset each July 1 that cannot exceed 8.25%. The rate for 2008-09 is 4.21%.
FEDERAL PLUS RATES
Federal PLUS Loans taken by graduate students or parents of undergraduate, dependent students are more straight forward in their interest accumulation. Like unsubsidized loans, interest begins when the loan is disbursed. Borrowers can elect to make loan payments at that point, interest-only payments, or can request the loan be deferred during the student's enrollment. Note that if full deferment is done, the interest will accumulate and compound onto (be added to) the loan principal.
Interest rates on PLUS Loans first disbursed beginning July 2006 is fixed at 8.5%.
PLUS Loans first disbursed July 1998 through June 2006 have a variable rate that resets each July 1 yet cannot exceed 9.0%. The rate for 2008-09 is 5.01%.
INTEREST ACCUMULATION
Interest is calculated and accumulates on loans annually (once each year) for federal loans. Note that non-federal educational loans may have interest calculated and added to the loan quarterly (four times a year). The frequency of this determination can greatly increase the cost of a loan. Obviously, the more often interest is calculated and added to the loan, the more the borrower is paying back in interest-on-interest.
LENGTH OF THE LOAN & PREPAYMENTS
Borrowers should also review the length of the loan. Federal loans offer a standard 10-year repayment. Online calculators can give you an idea of your monthly repayment amounts. Other options can also be exercised when you go into repayment.
Always recognize that the longer the loan repayment, the more you will repay in interest. While a longer loan can present lower monthly repayments, it can also result in a much higher amount to be repaid.
On the flip side, you can reduce your loan costs whenever you have a personal budget surplus. Think about increasing your payment beyond the minimum monthly amount whenever you can. But if you do, contact to servicer to ask to have any excess payment applied to accumulated interest first. This will reduce additional interest being charged on already accumulated interest.
Next, federal loans typically do not have any penalties for early repayment. If you can add to your monthly payment or make multiple payments when you get more financially on your feet, you can pay off the loan in a shorter period of time and reduce interest accumulation.
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