How interest applies to loans and what it means for you.

Understand how student loan interest rates work

In the grand scheme of debts, student loans are special interest rates and APR. Since you take out the loans to fund higher education, rates tend to be lower. Interest charges may also not apply certain times, like while you’re attending school. Otherwise, by the time you graduate, your loans would double in size before you ever start making payments…

Student loans usually have special considerations when it comes to interest, whether your loans are federal or private. Understanding the differences with student loan interest can make or break your ability to pay off your loans effectively.

How is student loan interest assessed?

The first difference with student loan interest comes in how APR applies to your loans. For other types of debt, APR is set based on your credit score. But that doesn’t work for student loans, because often students don’t have any credit history to qualify for low APR.

Instead, rates on federal student loans are set by the government. Prior to August 2013, rates were set by Congress and a new vote had to happen each year to determine the new rate. But legislative gridlock in 2013 caused student loan APR to jump to 6.8% percent.

The Bipartisan Student Loan Certainty Act of 2013 changed that system. Now interest on student loans is tied to the 1-year Treasury Note index. Each year, in early May, the rates for the next academic year get set based on the current performance of the T-note index.

Even if you take out private student loans, the APR will generally be lower than APR on other loans from the same lender. It’s also easier to qualify for these loans at lower APR, even if you have bad credit or no credit history.

No interest accrual on subsidized federal student loans

If you receive subsidized federal student loans based on financial need, you don’t need to worry about interest charges while you’re in school. Interest doesn’t accrue on subsidized federal student loans while you attend school. It won’t start to accrue until you graduate or drop below half-time enrollment.

Interest also stops accruing during a period of deferment.

Is it possible for the government to pay my interest for me?

Sound like a silly question? It’s not.

In fact, if you seek deferment on the basis of financial hardship or unemployment and you prove your case, then it is possible that the government will agree to make the interest payments on your loans until the deferment is over.

Basically, if you’re unemployed or really underemployed then you can seek a special deferment that delays your payments and makes you eligible for this government assistance. You need to talk to a student loan help specialist to see if that’s an option you can use.

Can consolidation reduce my interest rate?

Maybe – and this is what confuses a lot of people (and where you see a lot of consolidation program providers stretch the truth a little).

When it comes to student loans, consolidation only reduces your interest rates in some cases. If you took out your loans under the old deal and your rates were really high, you may qualify for loan rates when you consolidate under this new deal… but that’s not always the case.

This differs from something like credit card debt consolidation, where one of the main goals is to get lower APR applied to your debts. The goal there is to reduce your interest rates to less than 10 percent or eliminate them completely in some cases.

But student debt consolidation is different. Here, the number one goal is to lower your payments. So if you see an interest rate reduction, that’s awesome. But if you don’t, that doesn’t mean you’re signing up for the wrong program – just that it may not be possible to get a better rate.

Only a specialist can tell you so you know for sure, so you need to talk to someone if you think you’re paying too much or your interest is too high.

Article last modified on May 10, 2019. Published by, LLC