Federal Student Loan Interest Rates

Student loan interest is paid to a lender as a cost for borrowing their money. Federal student loan interest rate amounts are set by federal law, not by the lender or by the U.S. Department of Education (ED).

Student loan interest rates will vary by the type of loan and the first disbursement, or distribution, date of the loan. The federal student loan interest rate changes every year, but will usually be lower than other types of loans, especially if the loan is need-based.

Federal student loan interest rates are fixed. A fixed interest rate means that the amount you pay in student loan interest each year will remain the same throughout the life of the loan. Keep reading to learn more about student loan interest rates and how they work.

Federal Student Loan Interest and How it is Calculated

With every federal student loan, interest rate information is a vital part of understanding exactly how much you will have to repay. You must also understand how student loan interest is calculated and what fees are associated with your type of loan. Student loan interest is calculated as a percentage of your unpaid principal loan amount. Here some federal student loan interest rate percentages for loans first disbursed between July 1, 2028 and before July 1, 2019:

  • Direct Subsidized Loans/Direct Unsubsidized Loans for undergraduates: 05 percent
  • Direct Unsubsidized Loans for graduate or professional students6 percent
  • Direct PLUS Loans for parents and graduate/professional students: 6 percent
  • Perkins Loans: 5 percent

Direct Subsidized and Direct Unsubsidized Loan interest rate amounts accumulate daily, unlike credit cards, mortgages and other types of debt. They accrue student loan interest throughout each stage of the loan, beginning with the date of disbursement. You may be responsible for paying this accumulated student loan interest, depending on whether your loan is subsidized or unsubsidized. You will be responsible for paying unsubsidized loan interest rate amounts that accrue even when this type of loan is in deferment.

Related Article: Federal Student Loan Deferment

The interest on federal student loans is calculated daily according to a simple formula. The formula for federal student loan rates is multiplying your loan balance by the number of days since you made your last payment, then multiplying that number by your interest rate factor.  You determine your student loan interest rate factor by dividing the loan’s interest rate by the number of days in the year.

What is capitalization?

Interest capitalization is when unpaid federal student loan interest is added to the principal amount of the loan. Usually, your loan payment covers all of the student loan interest that adds up between monthly payments and you are not left with any unpaid interest. However, student loan interest will accumulate during times that you are not actively making monthly payments, such as during certain kinds of deferment. Student loan interest capitalization can add a significant amount to the total amount you owe.

You may also experience student loan interest capitalization if you are on an income-related repayment plan and your monthly payment equals less than the amount of interest that adds up between payments. If your lender decides to let student loan interest capitalize, it increases the outstanding principal amount that you will eventually have to pay off. That larger principal balance earns a little more interest the following month and each month after. Because this student loan interest adds up, you will eventually find yourself facing a higher monthly payment, depending on the terms of the loan.

Unpaid student loan interest is usually capitalized in the following circumstances:

  • Unsubsidized loan deferment
  • After the grace period on an unsubsidized loan
  • If you voluntarily opt out of an income-driven repayment plan
  • If you do not update your income information on certain income-driven repayment plans
  • If you lose your eligibility to make income-based payments
  • Forbearance on other types of loans, including capitalization of a:
    • Parent PLUS Loan interest rate
    • Grad PLUS Loan interest rate
    • Subsidized Loan interest rate
    • Stafford Loan interest rate

Note that student loan interest capitalization will vary depending on your repayment plan. Perkins Loans do not accrue student loan interest while you are in school and always come with a five percent interest rate, making them a good choice for students who are concerned about capitalization. However, Perkins Loans are needs-based and intended for low-income families.

Principal vs. Interest Payments

When you make a student loan payment, you may wonder, “How much is student loan interest,” and how much of your money goes toward reducing the principal balance of the loan. No payment will go toward the loan principal until all outstanding student loan interest has first been paid.

Use the federal student loan interest rate calculation formula shared above to find out how much interest has built up since your last payment. Then subtract this amount of accrued student loan interest from the monthly payment amount (and any other outstanding interest) to see how much of your payment will go toward reducing the size of your principal balance. Your loan servicer will be able to help you with specific questions regarding your student loan interest vs. principal payment amounts.

Additional Fees for Federal Student Loans

In addition to the federal student loan interest rate associated with your loan, you will usually have loan fees that are a percentage of the total loan amount. Like student loan interest, the loan fee adds to the total amount that you will eventually pay for borrowing these funds. Whenever you receive a student loan disbursement, the loan fee is taken off the top. You will notice that the amount of money you receive at disbursement is less than the amount you actually borrow because of these fees.

As with student loan interest, it is important to know loan fee rates so that you understand exactly how much debt you are taking on. Direct Subsidized/Unsubsidized Loans disbursed on or after October 1, 2018 and before October 1, 2019 carry a 1.062 percent loan fee, while Direct PLUS Loans issued during the same timeframe have a 4.248 percent fee.

Related Article: Direct Unsubsidized Loans

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