Student Loan Interest Rates

Each year, new student loan interest rates are published. Overall, interest rates have been relatively low; nothing like the rates that were experienced back in the early 1980s. That's good news for students because even though they can do very little to control the rising cost of tuition at their colleges, at least the interest rate on their student loans are reasonable.

Student Loan Loophole

The federal government is starting to pay more attention to student loans, and the interest rate charged on those loans.  We talked about the student loan loophole, which funnels billions of dollars into the hands of lending institutions by subsidizing low interest rate loans.  If it ever gets passed, the Student Aid Reward Act has the potential to save taxpayers billions of dollars, while putting more money to work for students in the form of additional funds for loans.

Current Student Loan Interest Rates

The interest rates we're going to talk about are for student loans that were disbursed starting on, or after, July 1, 1998.  Interest rates also change annually, so we're talking about the time period from July 1, 2011 through June 30, 2012.

Direct Loans

Direct Student Loans are one of the Federal Student Aid, or FSA, programs that are available through the Department of Education.  Direct Student Loans provide students with a way to borrow money to pay for their costs of higher education.

The Direct Loan interest rates for loans taken, or disbursed, on or after July 1, 2011 carry a 3.40% fixed rate of interest.  Direct PLUS loans, which are made to parents of students, issued in that same timeframe charge a rate of interest of 7.90% for 2011 / 2012.

Direct or Federal PLUS Loans

Federal PLUS loans, which are also known as Direct PLUS loans, are taken out by the parents of students, not the students themselves.  The abbreviation PLUS stands for Parent Loan for Undergraduate Student.  These are federally-insured loans parents can take out to pay for a dependent's education.

For the time period July 1, 2011 through June 30, 2012, the interest rate for new PLUS loans are 7.90%.  The interest rate on PLUS loans will vary from year to year, but will never exceed 9.0%.  For PLUS loans disbursed prior to July 1, 2006, the interest rate is 5.01%.

Stafford Loans

Federal Stafford loans follow the same guidelines as Direct Loans.  Stafford loans disbursed between July 1, 2011 and June 30, 2012 have a variable interest rate that changes on July 1st of each year, but cannot exceed 8.25%.  The rate of interest on these student loans is 3.4% for those in repayment; and 6.80% for loans during in-school, deferment, and grace periods in 2011 / 2012.

The interest rate on a Stafford loan is based on the 91-day Treasury bill rate, with the exact formula being:

• For in-school, grace, and deferment periods - the 91-day T-bill rate + 1.70%
• During repayment periods - The 91-day T-bill rate + 2.30%

Consolidation Loans

Federal consolidation loans are just that; the consolidation of multiple loans into one monthly payment.  This means the exact interest rate on these loans needs to be calculated on an individual basis, using a weighted average calculation approach.  A simplified formula for weighted average is:

(Loan 1 ($) x Interest Rate + Loan 2 ($) x Interest Rate) / (Loan 1 ($) + Loan 2 ($))

As a rule of thumb, the consolidated loan interest rate can never be higher than the highest interest rate of an individual loan.  It will also never be lower than the lowest interest rate of an individual loan.  As a borrower, you can expect a consolidated loan in the range of 4.75% to 6.125%.

Interest Rates on Private Loans

The interest rates on private loans can be nearly as numerous as the number of agencies writing those loans.  In general, private loans in 2011 / 2012 can range from a low of around 6% to as high as 12%.

The exact interest rate will depend on your credit score, the amount borrowed, and the term or length over which the loan is repaid.  As a rule of thumb, the interest rates of these loans are indexed against the Prime lending rate, sometimes referred to as Prime plus.

Student Loan Fees

Under some private student loan programs, the lending institution may charge a loan fee.  Fees for student loans are typically stated in terms of a percentage of the loan, just like points on a mortgage.  The exact fee paid will depend on the loan program itself, the credit rating of the student, and the interest rate charged.

Student Loan Fee Example

For example, a lender might offer a student a loan with an interest rate of 7.15% and a 1% fee.  If the student was borrowing $10,000, then the fee would be added to the loan's principal.  In this example the student would have to pay back $10,100 in principal plus interest at 7.15%.

If you're thinking about taking out a private student loan, and the lender is charging a fee, then you can use one of our many mortgage calculators to see the exact impact the fees have on your monthly payments.  If you have a choice of paying a fee for a reduced interest rate on the loan, our calculators can help you figure out which loan is the best choice; given your financial situation and the loan offer.

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