It is quite common knowledge that student loan debt is now a major problem for many people. Sadly, many individuals who took out various students loans do not know how student loan interest rates work. When many people apply for student loans, they simply accept the terms and conditions without question. They didn’t ask about interest rates or even spend the time to understand how loans would impact their life in the future. If you are in the same boat, here are some facts you need to know about interest rates on students loans.
Mutual Benefit
When borrowing money to finance your college education, lenders require something in exchange to ensure the deal is mutually beneficial. That’s why there are interest rates. Lenders usually impose an annual amount as a percentage of the total amount of money you borrow. These interest charges are then added to the total balance, which should be repaid monthly.
The annual percentage rate (or simply APR) will depend on a number of factors, including time. Today, it is common to pay an interest rate of approximately 3% to 6%. Federate student loans are offered by the relevant government body, which sets the interest rates. Loan servicers do not set their own interest rates and in most cases, loans carry a fixed rate throughout the entire duration.
Credit History
On the other hand, private lenders are able to set their own rates. While base rates are determined based on the same considerations as federal students loans, most private lenders will take your credit history into account when setting your interest rates.
When does the interest starts?
Your student loan interest typically starts accumulating immediately as soon as you get approved for the loan. You are then required to start repaying the loan towards the total amount borrowed and the interest accrued at the end of your grace period.
Strategies
There are some strategies to reduce the amount of interest one pays over the duration of the loan. One of the best strategies is to pay off the amount as soon as possible. Since interest accumulates each day, paying off your student loan debt quickly will reduce the amount of interest you end up paying.
If you have very high rates on your loans, you may want to consolidate them to get a private loan at a single interest rate, which is usually lower than what you have with the separate federal loans. This can save you a significant amount of money over the duration of your loan. With this in mind, you can reduce the stress that comes with student loan interest rates.