Student Loans cost money because students have to pay interest on the funds they borrow. The cost is known as the cost of interest or simply interest cost.
Interest cost shows how much you will pay in interest over the life of the loan, assuming you keep the loan for the full period.
The most important student loan is the one with lowest interest rate.
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Interest Rates Overview
Student loan Lenders loan money to students. Their primary concern is making money.
Lending institutions are businesses and they need inflow of funds in order to make their operations work and profit. One of the ways that lenders make money is by charging
Interest on loans they made to borrowers.
The profits generated from the interest keeps the business profitable and keeps the amount of money available for lending replenished.
How It Works
A borrower pays more than the purchase or loan amount due to the interest cost. This is the cost of borrowing money. The term interest cost is the total amount that you will pay in interest on a
loan if you keep the loan for its entire term.
Federal Loans and Cost Of Interest
With Stafford Loans Subsidized, the federal government pays the interest while the student is still in college.
On Stafford Loans UnSubsidized, the student is responsible for the interest while he or she is still in school.
Students may, if they want to, defer paying the interest by capitalizing it. This adds the interest to the principal of the loan, thereby increasing the size of the loan.
When you defer the payment the actual cost of the loan increases.
Private Loans and Cost of Interest
Private Student Loans are very similar to unsubsidized Stafford loans. The student is responsible for paying the interest.
The cost of interest is higher than of federal loans, due to higher Interest Rates
Fix Rates
When we talk about fix Interest Rates we refer to the loan rate over a period of time. For the length of the loan the rate does not change. It is fixed and the loan
payment can not increase due to interest rate changes in the marketplace. The cost of interest is the same from the beginning to end of the loan.
Variable Rates
Variable interest rates vary depending on market conditions. Student Loans with variable interest rates during high
rate period are good, because chances are the rates will come down and you will have to pay less. The cost of the interest rate will change and it will increase or decrease
depending on the factors listed above.
Interest Rates Reduction
The federal government has reduced Interest Rates on
Federal Stafford Loans Subsidized. The reduction allows borrowers to make smaller payment on their
student loans. Only loans made after July 1, 2008 will be eligible for the reduction. Please visit our Interest Rates Reduction center
for full details.
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Student Loan Tips |
Q: Take Out Student Loans As The Last Resort
When you try to get all types of Financial Aid and you do not receive anything or if the amount of money is not enough try borrowing money by taking out loans.
Q: Save Money On Repayment
If you ever are in a position to make an over payment on your loan without spreading your finances too thin, absolutely do it.
Q: Apply For Student Loans On the Same Day
We are not sure if this tip is valid, but if you have to apply for more than one student loan (different banks) do it on the same day. This will prevent the second bank to see your first loan on the credit history and it will be easier to get qualified.
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Important Questions |
Q: Is the interest tax deductible?
Most people can deduct interest paid on Federal Student consolidation Loans. Consult your tax advisor for more information.
Q: Which loan provides the lowest rates?
The Federal Perkins Loan has the lowest interest rate of 5%, as it was designed for students with exceptional financial need.
Q: How is the interest rate determined?
The interest rate is determined by taking a weighted average of the interest rates on all loans to be consolidated and rounding up to the nearest 1/8 of 1% or 8.25%, whichever is less.
View All Questions
Interest rates vary by student loans program and by lender. On top of that, interest rates for your private student loans will be based on your credit worthiness.
Interest rate cost is what you are charged for borrowing funds for your education. For quick looked to see
what the interest rates are by loan check out Interest Rates Center.
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