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Student Loan APR: Calculating the Real Costs

Before you borrow money, it’s incredibly important to research and understand the terms and conditions of each loan you are considering. Throughout the process you will be given opportunities to compare federal and private student loans. But there’s one question many borrowers wonder about. What is the actual APR (annual percentage rate), and what is the ultimate cost of the loan? We’ll break it down, and let you know what type of information you will receive when you decide to borrow a federal or private student loan.

How Much Do Student Loans Cost?

The cost of a loan is the total amount you repay, which includes interest and fees. Federal student loans have both origination fees and interest charges, whereas private student loans typically offer zero origination fees while charging interest. Other fees could include late payment penalties. And these costs can have great impacts on the amount you will have to repay, especially over time.

Generally, these terms are spelled out in your promissory note and are disclosed up front. While the federal student loan program has the option to charge late payment fees, the Direct Loan program is currently not charging late fees.

Difference Between Interest Rate and APR

The interest rate refers to what the lender charges for borrowing money, represented as a percentage. The APR, on the other hand, includes ALL of the additional fees or costs that may be associated with the loan. It is the most accurate way to evaluate the true cost of borrowing, where all charges are included in the effective interest rate, or APR. While private loan lenders are required to provide an APR disclosure the Direct loan program provides no such disclosure.

Compare Featured  Private Student Loan Lenders

Best for Private Loans
Interest Rates

Variable Rates: 1.13% APR - 11.23% APR1

Fixed Rates: 3.50% APR - 12.60% APR1

Repayment Terms


Best for Private Loans
Interest Rates

Variable rates as low as: 0.99% APR1

Fixed rates as low as: 2.99% APR1

Repayment Terms

5, 8, 10 or 15 years2

Best for Private Loans
Interest Rates

Variable as low as: 4.13% APR1

Fixed as low as: 3.99% APR1

Repayment Terms

5, 10 or 15 years

Best for Private Loans
Interest Rates

Variable rates as low as: 1.96% APR1

Fixed rates as low as: 3.69% APR1

Repayment Terms

5, 10, 15 years1

Best for Private Loans
Interest Rates

Variable rates as low as: 0.99% APR1

Fixed rates as low as: 2.99% APR1

Repayment Terms

5, 7, 10, 12 or 15 years

Below is a sample comparison of a fixed rate private student loan vs. a Direct PLUS Loan to help demonstrate the actual cost of the loan. When it comes to the assessment of an origination fee on a federal student loan, it’s important to note the fee will be calculated based on the gross amount you are borrowing. What this means? You need to borrow more than you need, check out the example below.

Assumptions: Your child needs $20,000 to cover their tuition bill. You want to borrow a loan to help your child. You are comparing two loans with a fixed interest rate of 5.3% with immediate repayment of principal and interest.

Private Student Loan Loan Terms Direct PLUS Loan
$20,000 Amount Needed $20,000
$20,000 Gross Amount Borrowed $20,884.68*
0% Origination Fee 4.236%
5.30%+ Interest Rate 5.30%
$20,000 Total Loan Amount Applied to Student’s Account
(Gross amount minus fees)
10 years Repayment Term 10 years
$5,809.11 Total Interest Paid $6,066.07
$25,809.11 Total Paid Over Life of Loan $26,950.75
5.30% Annual Percentage Rate (APR) 6.213%

*In order receive the full loan amount, you would need to borrow enough to cover the fees. Otherwise, a $20,000 loan would amount to $19,152.80 applied to the student’s account.

+Interest rate in this example is fixed. However, most private student loan lenders also offer variable rates. Today’s lowest APRs start at 1.74%.

Impact on Student Loan Repayment: 10-year Standard Plan

Private Student Loan Repayment Terms Federal PLUS Loan
10 Total Years in Repayment 10
120 Total Months in Repayment 120
$215.08 Monthly Payment Amount $224.59
$25,809.11 Cost of Loan $26,950.75

Here’s one more scenario to consider when looking at repayment.

Let’s review the impact of choosing an income-driven repayment plan offered under the federal student loan program. It’s important to note that Direct PLUS loans borrowed by a parent can’t be repaid under an income-driven repayment plan unless the loan is consolidated into a Direct Consolidation Loan and is repaid under an income-contingent repayment plan.

Scenario: Your $20,000 Direct PLUS Loan was consolidated into a Direct Consolidation loan. The new interest rate of the Direct Consolidation Loan is 5.375%.

You are married with a household size of 4. Your household income is $40,000 and you live in Massachusetts. You are repaying your loan under an income-contingent repayment plan. After 25 years of eligible payments, any remaining loan balance will be forgiven.

Repayment Terms Direct PLUS Loan
Repayment Plan Income Contingent Repayment
Total Years in Repayment 25
Total Months in Repayment 300
Monthly Payment Amount $154 - $0
Total Amount Paid $23,267
Loan Forgiveness Amount $16,734*

*Based on current law, and amount forgiven under and income-driven repayment plan is considered taxable.

Private Student Loan Origination Fee

Private student loan lenders are known to offer competitive interest rates and fees, based on the creditworthiness of the borrower (and cosigner, if applicable). Most, if not all, of the participating lenders on our website offer zero origination fees. As noted in the sample calculation above, this can make a tremendous impact on the total cost of borrowing, especially with higher loan balances.

How Interest Accrues on Student Loans

Interest accrues on student loans as either simple interest or compound interest. This all boils down to the type of loan you borrow, and the terms provided by the lender.

Simple Interest vs. Compound Interest

Federal student loans use what is called Simple Daily Interest to calculate the amount of interest you pay. As the name implies, daily interest is charged. However, many days have gone by since your last payment is number of days’ worth of interest that get subtracted from your payment before any of money is applied to your principal balance. And it is calculated on the principal balance outstanding. If you have a Direct Subsidized Stafford Student loan, your interest is being covered by the federal government while you’re enrolled in-school at least half-time, as well as during your grace period, or during other times of authorized deferment. For Direct Unsubsidized Student Loans and Direct PLUS loans, you are responsible for the interest from the first disbursement.

Compound interest basically means your lender will charge interest that has accrued on not only your principal balance outstanding, but also any unpaid interest owed. Compounding can occur anywhere from daily to annually. Compound interest is also known as paying interest on interest. Fortunately most student loans, including private student loans, use a simple interest formula. But some private student lenders may use compound interest instead. It’s best to read the terms of your loan to understand how interest will be charged.

Capitalized Interest on Student Loans

Beyond interest accrual, there is a bit more to the way loans work. Federal student loans have built in periods where outstanding interest can be capitalized (added to your outstanding principal balance of your loan). Because the simple daily interest formula uses the outstanding principal balance to assess your interest charge, capitalization is an important concept to understand.

For the most part, federal student loans may capitalize interest when your loan changes repayment status. For example, when your grace period ends, and you enter repayment—or when you use a forbearance but were unable to pay the interest that accumulated. That’s why you will always hear the advice, pay off your interest charges while you’re enrolled in school.

Student Loan Disclosures

There is a lot of paperwork involved in borrowing federal and private student loans. Disclosures are intended to keep you as informed as possible. The types of disclosures you receive will depend on the type of loan you are borrowing.

Federal Student Loan Disclosures

The federal government will send you a notice of your Rights and Responsibilities and will require you to complete a Master Promissory Note. If you are borrowing a Direct PLUS loan, you also need to sign an authorization that will allow the U.S. Department of Education to pull your credit.

Your borrower Rights and Responsibilities will outline what you need to know and explain what you are entitled to along with what your duties are as a borrower.

Your Master Promissory Note is the legal document between you and the U.S. Department of Education. The Master Promissory Note also explains terms and conditions of your loan.

When a portion of your loan is disbursed, you will receive a disclosure statement which will explain the expected date and amount of your disbursement, your right to cancel all or a portion of your loan, and the procedures and timeframe for notifying your school to cancel all or a portion of your loan.

Truth in Lending Act (TILA): Private Student Loan Disclosures

TILA requires three different disclosures to borrowers of private student loans. It may seem like a lot of paperwork, but it is important to read these disclosures! They outline the details of your loan, and some of the implications of borrowing those funds, i.e., explain the amount you can expect to pay each month or overall.

The first disclosure is meant to explain the loan rates, fees, and terms. Don’t be surprised if this notice also explains that federal student aid options may be available to you. And if you haven’t looked into those options, we would always encourage you to do so. This disclosure you will provide you with details on how to find additional information regarding those options.

The second disclosure is sent to you (the borrower) once your lender approves your application. This disclosure may or may not be part of the Promissory Note process. Since this is provided around the time of your approval, you will be provided with the details about your rate, fees, and other terms of your loan. You may also notice that this disclosure will provide you with some repayment estimates based on the current interest rate, and if applicable, the repayment numbers associated with the maximum interest rate on the loan, as set forth in your terms. What you will see is your monthly payment amounts, and total repayment amount. Your lender must give you 30 days after a private education loan is approved to decide if you want to accept or deny the loan.

The third disclosure will provide you with some of the same information you saw in the first and second disclosure. This disclosure will be issued after you complete the Promissory Note and have accepted the loan with your lender. Your lender is required to provide any updates to the amounts previously disclosed, if necessary. This disclosure will also give you a 3-Day Right to Cancel. Your lender will need to wait for the three-business day period to elapsed prior to disbursing your loan funds.

And finally, the Private Education Loan Applicant Self-Certification form you will be required to complete. This could be completed during the Promissory Note process, but if it is not, your lender will need to wait until the form is completed. This is a form provided by the U.S. Department of Education.

When it comes to making a decision about choosing a student loan, it’s really about what makes the most sense for you. Find the loan that makes the most sense for you, and that is the most affordable for your situation.


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