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Student Loan Interest Rates

Miriam Said:

Can somebody clarify how student loan interest rates work?

We Answered:

The 7% is an APR, or annual percentage rate. Divide it by 12 to get the monthly rate - 0.5833%. This is what is charged on the balance. Interest accrues on the loan and is deferred while you're in school. When you graduate, it all capitalizes, meaning it's lumped together.

Say you took out $10,000 in loans.
You would own $10,000 at the end of year 1 plus $700 in interest.

While you're in school, interest would be accumulation at $58.33 per month.

At the end of 4 years you'd owe $10,000 plus $2,800 in interest.

This would be added together to $12,800.

Going forward, the interest you would owe on the next payment would be $12,800 * .0058333 = $74.66.

Does that make sense?

Secondarily, Prime + x% is the Prime Rate, published by the Wall Street Journal. It's the federal funds rate + 3%. So if you get a student loan that's prime + 4%, it's:

Funds rate + 3% + 4%
5.25% + 3% + 4% = 12.25%

Hope this helps!

Christopher S. Penn
Producer, the Financial Aid Podcast
Daily free financial aid internet radio, no iPod required
FinancialAidPodcast [at] gmail [dot] com

June Said:

Agency that controls Student Loan Interest Rates?

We Answered:

market is controlling rates...…

there's some great rates... if you have a good credit score

Warren Said:

Student loan interest rates and taxes?

We Answered:

You can't write off a collection. You can only deduct the interest paid on student loans, if you paid a flat amount this may not have included interest. However, if any or all of the amount paid off was interest the collection company should send you a 1098, if you haven't received one you may want to contact them.

Melinda Said:

If interest rates are so low, why are my student loan interest rates higher than ever?

We Answered:

The interest rate for alternative education loans is based on a number of factors, including credit history and the lender that you are choosing. Rates can vary from lender to lender and can also vary from year to year. Did you have a change in your credit history? You might want to get a credit report to check for changes. If there are no changes, then it is still possible for the lender to change your interest rate. Unlike federal student loans, which have the same interest rate as determined by the federal government, lenders have the liberty of determining your interest rate. For specific reasons as to why it has increased compared to last year or semester, you are best to contact your lender.

Thomas Said:

How do we make Student Loan Interest Rates go back down?

We Answered:

Elect a Democrat. The House just recently passed legislation to lower student loan interest rates from 6.8% to 3.4%. Bush opposes it.

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