What Is The Interest Rate On Student Loans?

This article offers everything you need to know about the types of student loans, repayment of student loans, and The Interest Rate On Student Loans.

Taking into account the economic uncertainty of the world nowadays, it is very important that you have something with you that can help you secure your future. The importance of a college or university degree is growing significantly in recent years as more and more people believe that a degree can get them better chances of employment.

However, attending a university or college is not possible for everyone, considering the extremely high tuition costs involved. The only resort that most people have is to take student loans to pay for their tuition fees. Student loans are loans that are given out to students by the government, such as Federal Loans, and private student loans are available as well. These massive loans enable those students to pursue a secondary education who would not have been able to do so otherwise.

Hence, an increasing number of indebted students graduates each year all around the world. Student Loans are meant to be paid back over the course of a specific time period through monthly payments. Mostly, the payments are meant to start at least six months after the recipient finishes their degree.

Interest on a loan is payment from a borrower to a lender, of an amount above repayment of the principal sum, at a particular rate. The interest you are charged is determined by things like your credit history, income, loan amount, loan terms, and current amount of debt. Like all other loans, student loans also come with an interest that needs to be paid other than the repayment of the principal sum.

Types of Federal Student Loans

To apply for federal student loans, you need to submit the free FAFSA ( Free Application for Federal Student Aid) application. The amount of loan you can borrow varies according to your desired level of education, that is undergraduate or postgraduate. The federal student loans are of three main types:

  1. Direct Subsidized

Direct subsidized loans are only available to undergraduate students who can demonstrate a financial need. The amount of the loan is determined by your school and it may not be more than your demonstrated need. The payments for the repayment of these loans do not commence before at least six months after your graduation. The plus point of direct subsidized loans is that the US Department of Education pays the interest on your loan during the time when you are in school, the six months after graduation, and during any periods of forbearances. As a result, during the aforementioned periods, the interest does not accrue on the amount of money that you initially borrowed.

  1. Direct Unsubsidized

Direct unsubsidized loans are available to both undergraduate and graduate students, and there is no need to demonstrate financial need. The amount you can borrow is determined by your school accordingly. Unlike direct subsidized loans, the interest on direct unsubsidized loans is not paid by the US Department of Education, you are responsible to pay the interest. If you do not want to pay the interest during your time in school, the grace period of six months, and any forbearance periods, it will automatically be capitalized. Capitalization refers to the addition of the interest to the principal amount that you have borrowed.

  1. Direct PLUS.

Direct Plus loans are federal loans available to parents of graduate and undergraduate students, and have a fixed interest rate and the interest has to be paid by the recipient in all periods. A direct plus loan is very similar to a direct unsubsidized loan but the processing fee for it is much higher than that of direct unsubsidized. Also, there is no grace period for the repayment of a direct plus loan begins immediately after the student receives the loan. Your parents should not have an adverse credit history if you plan to take out a direct plus loan.

What is the Interest Rate on Student Loans 2020

Interest can be described as the amount of money that a lender charges periodically from the borrower apart from repayment of the principal sum. Different kinds of loans have different interest rates to them, and sometimes some loans might even come interest free. However, if you receive a Federal Student Loan, you should know that it requires to be repaid with interest. It is very important to understand that the processing fees for a loan and the interest for a loan are two different things. So, before taking out a loan, it is essential that you weigh the pros and cons of availing the opportunity. The interest rate on student loans changes every year for new loans and remains at a fixed rate for the entire life of the loan. The new interest rate is declared on July 1st of every year.

Following the Covid-19 virus, in 2020, the US Federal Student Aid provided relief to the existing borrowers of Federal Loans. Interest has temporarily been set at 0% on Federal student loans. In addition, Federal student loan borrowers were automatically placed in an administrative forbearance, which allows them to temporarily stop making their monthly loan payments. This 0% interest and suspension of payments will last from March 13, 2020, through at least September 30, 2021, but payments can still be made if one chooses to do so. However, all of this applies only to existing borrowers and not the loan borrowers for the session 2020-2021.

Federal loans meant to be borrowed in 2020 are considered as new loans. The student loan interest rate for undergraduates taking out new federal loans was set at 2.75% only for the year 2020-2021. The interest rate on federal direct unsubsidized loans for graduate students is set at  4.3%, down from 6.08% in 2019-2020, and the interest rate for federal direct PLUS loans, including Graduate PLUS and Parent PLUS Loans is set at 5.3%, down from 7.08%.

The interest rate on student loans is considerably low in 2020 and is a very good opportunity for the loan borrowers of the session 2020-2021.

What is the Interest Rate on a Canada Student Loan?

A survey reveals that over 40% of recent Canadian graduates have used a loan of some kind to fulfill their tuition costs. Just like the United States, Canada also offers its students different kinds of loans that they can take out to pursue a secondary education. Canada offers loans to students at a federal level, and most provinces offer their own funding as well. Apart from this, some students might be interested in private funding through banks as well. These loans have a higher interest rate than federal or provincial ones.

The Federal student loans in Canada fully cover the tuition cost for the borrower, and having access to provincial funding as well can add extra dollars to the borrower’s account. The repayment of the federal loans in Canada starts at least six months after the recipient has graduated. The interest rate on a Canada student loan is set at 2.5% plus prime. If you are wondering what ‘plus prime’ means, it is the annual interest rate Canada’s major banks and financial institutions use to set interest rates for variable loans and lines of credit, including variable-rate mortgages.

The prime rate in Canada, as of 2021 is 2.45%, which makes the interest rate on Canada student loans a 4.95% (2.5%+2.45%=4.95%). By default, the Canada students loans have a floating interest rate which depends on the prime rate. The recipient can change to a fixed interest rate anytime after they have entered repayment, but not before that. This makes taking out a federal student loan a tougher decision for students in Canada as compared to the USA, considering that the prime rate fluctuates often.

Do you have to pay Interest on Student Loans?

Just like any other loan taken out for any other purpose, student loans also come with interest rates. When you take out a mortgage to buy a house, the lender of the mortgage has a security in the form on your property that he can sell in case you are not able to pay back the money you have borrowed. However, this is not the case with student loans, be it federal, provincial, or private, the lender does not have any security asset. As a result, the interest rates for student loans are particularly high, and even higher for the private ones.

In the US, the federal loans have a fixed interest rate that applies for the entire duration of the loan. This interest rate varies every year, and for 2020-2021, it was set at a very low value, 2.75% only, owing to the Covid-19 emergency.

In Canada, the federal student loans have both a variable and a fixed interest rate. The recipient can either follow a floating interest rate or a fixed interest rate in the repayment of the loan. The interest rate on Canada student loans in calculated as:

                                   2.5% + ‘prime rate’ = interest rate on student loans

The prime rate, also known as the prime lending rate, is the annual interest rate that major banks and financial institutions in Canada use to set interest rates for variable loans and lines of credit, including variable-rate mortgages. The prime rate in Canada fluctuates every year and back in January 2019, it was a staggering 3.95%. As of 2021, the prime rate is set at 2.45%, a comparatively low percentage. Using the formula mentioned above, mathematically, the interest rate on Canada student loans is 4.95% for 2020-2021.

Interest on student loans has to be paid apart from the repayment of the principal sum of money that initially borrowed. Nowadays, interest rates on student loans are even higher than those on property loans. The reason for this is that the borrower being a student, does not necessarily have a history of a good loan repayment.

What is the best Interest Rate for Student Loans?

If you choose to attend college or university, one thing is certain, you will need to pay huge costs. These costs include tuition fee, books and related supplies, and most importantly dormitory charges if you plan to move to another city. Student loans are loans taken out by students so that they can pursue their dreams and not let a lack of money become a hurdle in their endeavours. The most popular kind of student loans are federal student loans. However, the federal student loan might not be enough to cover all of the costs that come along with a secondary education, besides the tuition fees. Private loans come to the rescue of such students and help them cover costs that federal loans and grants do not.

The federal student loans have a fixed interest rate for the entire life of the loan. The interest rate is set by the federal law and is declared on July 1st of every year. Private loans take into account the credit score of the recipient, so a good credit score can result in a lower and better interest rate. It is possible to get a private student loan with an interest rate as low as 3% or 3.5% if you have an excellent credit score. Direct subsidized loans usually have the lowest interest rate, and direct unsubsidized loans have a lower rate than direct PLUS loans.

                      Direct subsidized > Direct unsubsidized > Direct PLUS

We cannot say that any one of the above mentioned loans offers the best interest rate. You can assess carefully and choose the best type of loan for yourself that according to you has the best interest rate. For instance, if you have a very good credit score, taking out a private student loan would be a much better option than taking a federal student loan.

Student Loan Calculator

The amount of money that you can borrow under a student loan, be it federal or private, has a maximum limit to it that varies according to your level of education. Undergraduate students who decide to take out federal loans, can borrow up to $12,500 every year, and in total, an amount of $57,500. For students pursuing post graduate and further studies, the total loan amount equals to $138,500 or $20,500 annually.

The amount of money that you can borrow under private student loans also varies from lender to lender. I would suggest that you reap the most benefits out of federal student loans before resorting to private ones. You should calculate the total costs that you would be needing to attend college or university, and then determine how much you would need to borrow.

Student Loan Repayment Calculator

Taking out a student loan is a tough decision and one that would eventually shape your future. This means that after you graduate, you would owe a huge sum of money that will be required to be paid back between 5 – 10 years, or in some cases 5 – 20 years. Federal students loans usually have a standard 10- year repayment plan, but can also offer as long a plan as 25 years. The 10- year standard repayment divides the amount you owe into 120 level payments so you are required to pay the same amount every month for 10 years. Under this plan, payments can’t be less than $50. Hence, it is very important that you calculate the estimated amount that you will have to pay monthly once you graduate, and choose your career wisely. A shorter loan term can give you access to a better (lower) interest rate but a higher monthly payment.

If you do not know how to calculate the monthly interest amount that you will have to pay for your student loan repayment, the following text will guide you thoroughly.

You first take the annual interest rate on your loan and divide it by 365 to determine the amount of interest that accrues on a daily basis. Say you owe $10,000 on a loan with 5% annual interest. You’d divide that rate by 365 (0.05 ÷ 365) to arrive at a daily interest rate of 0.000137.

You’d then multiply your daily interest rate in Step 1 by your outstanding principal of $10,000 (0.000137 x $10,000) to figure out how much interest you’re assessed each day. In this case, you’re being charged $1.37 in interest on a daily basis. Lastly, you’ll have to multiply that daily interest amount by the number of days in your billing cycle. In this case, we’ll assume a 30-day cycle, so the amount of interest you’d pay for the month is $41.10 ($1.37 x 30). The total for a year would be $493.20. The interest of $41.10 can be added into the monthly payment without interest and that will give you the total amount that you will owe every month.


The costs of secondary education have risen at a very steep gradient since the last five years. The high costs become a hurdle in the way of many students who want to pursue undergraduate or graduate studies. Fortunately, student loans are a saviour for many students and help them pursue their careers and passions. In recent years, the demand for student loans has increased significantly as more and more people realize that a degree can get them a much brighter future. However, student loans come with high interest rates that have to be paid on the principal sum along with the repayment of the principal amount. Different kinds of loans have different interest rates to them. It is very important that before taking out a loan, you calculate the monthly payment that you will have to pay when repaying the loan. The interest rates on student loans are very crucial to loan repayments and must be assessed thoroughly before making any decision.

John Otero

John Otero

John Otero is an industry practitioner with more than 15 years of experience in the insurance industry. He has held various senior management roles both in the insurance companies and insurance brokers during this span of time. He began his insurance career in 2004 as an office assistant at an agency in her hometown of Duluth, MN. He got licensed as a producer while working at that agency and progressed to serve as an office manager. Working in the agency is how he fell in love with the industry. He saw firsthand the good that insurance consumers experienced by having the proper protection. John has diverse experience in corporate & consumer insurance services, across a range of vocations. His specialties include Major Corporate risk management and insurance programs, and Financial Lines He has been instrumental in making his firm as one of the leading organizations in the country in generating sustainable rapid growth of the company while maintaining service excellence to clients.