3 Surprising Facts About Student Loan Interest

Written By Mary Beth Eastman
Last updated December 8, 2020

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October 17, 2018

Simple. Thrifty. Living.

The cost of tuition grown so much over the last few decades that more than 70% of students use loans to pay for college enrollment. If you don’t have much experience with loans, then you may not know how student loan interest affects you and other students. These three surprising facts about student loan interest may encourage you to repay your loans as soon as possible.

The interest rates for federal student loans change from year to year, but they’re typically lower than the interest rates charged by private institutions.

In 2018, undergraduate students paid 5.05% on their Direct Subsidized and Direct Unsubsidized Loans. Graduate and professional students paid 6.6% on their Direct Unsubsidized Loans. Direct PLUS Loans carried a 7.6% interest rate for graduate and professional students.

Students who get loans from private institutions can expect to pay higher rates. Overall, private student loans have an average interest rate of 7.99%. The average interest rate of a private student loan without a cosigner, however, jumps to 9.25%.

Even though the federal government charges lower interest rates, it still generates income from student loans. The precise amount of money changes depending on how you evaluate student loan payments. According to the Congressional Budget Office, the federal student loan program earned $1.6 million in 2016.

Luckily, undergraduate students don’t have to worry about the federal government taking advantage of them. All of the profit comes from loans given to graduate and professional students.

Although Direct Subsidized and Direct Unsubsidized Loans have the same interest rate, you’ll spend less money in the long run by choosing subsidized loans. When you take a subsidized loan, the government pays the interest until you leave school. Unsubsidized loans, however, start accumulating interest immediately.

Private institutions also begin charging interest as soon as you accept their student loans. As a result, people with private and unsubsidized loans face larger debts when they graduate.

Several factors have contributed to college tuition hikes. Some driving forces behind increases include the higher demand for degrees, inadequate (and falling) funding from state governments, and an increased need for financial aid. Until someone finds a way to solve these problems, students will keep relying on loans. Unfortunately, that means they face a lot of debt when they enter the workforce.

About the Author

Mary Beth Eastman

Mary Beth Eastman serves as the content manager for Simple. Thrifty. Living, where she is dedicated to helping readers use money and credit wisely. Mary Beth believes that access to the right financial information paired with a growth mindset are essential tools for getting out of debt and building wealth. Mary Beth has a degree in Journalism from Bowling Green State University and has focused her 20-year journalism career on putting readers front and center, carefully considering their concerns and presenting information that will help them in their everyday lives. She has won numerous statewide journalism awards. Her writing on personal finance as been featured on numerous websites in addition to Simple. Thrifty. Living, including Huffington Post and Lexington Law blog. Mary Beth resides in Pittsburgh, Pa., with her family and two rescue dogs.

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