FAQs About Loan Interest Rates

Many students and prospective students are understandably concerned about how student loan interest rates work. Here you can find some frequently asked questions about student loan interest rates that aim to make this complicated topic more comprehensible.

Q: What factors affect the loan interest rates that students are offered?

A: Several factors can affect the interest rate offered. Primary among these is the kind of loan: subsidized or unsubsidized. Subsidized loans are offered based on need as determined by the FAFSA (Free Application for Federal Student Aid). However, and counter-intuitively, it is worth noting that credit history is generally not a factor in government-subsidized student loan programs like the ones listed above.

Q: What does the interest rate mean?

A: The interest rate is the money paid in order to borrow money. If you have a loan with an annual percentage rate (annual percentage rate is often abbreviated as "APR") of 6 percent, compounded monthly, that means you are charged one-half of a percent per month of the remaining loan balance. For example, if you borrow $10,000 at an APR of 6 percent, you are charged $50 per month in interest; however, for subsidized loans, the government pays the interest while you are in school. For unsubsidized loans, although many lenders do not require you to pay the interest while you are in school, the interest is added to the principal balance of the loan and additional interest is charged on that, too. So if you borrow $10,000 via an unsubsidized loan program, and do not pay the interest for four years; at the end of the four years you need to start making payments on the new balance of $12,704.89.