There are a lot of things to consider before accepting a student loan, including the amount, the type, and the APR. However, what does a student loan APR mean for you?
What is a Student Loan APR?
APR stands for Annual Percentage Rate. It refers to the percentage of interest you will pay on a loan per year. For example, if you borrowed a $100 at a 5% APR and paid none of this amount, you will have accrued five dollars in interest after a year. Before accepting a federal or private loan to pay for college, you should carefully weigh your options when it comes to interest rates and the principal amount of the loan.
The APR for a loan will be included in the offer before you accept. It’s important that you don’t overlook this crucial number.
APR for Direct Subsidized Federal Loans
You can apply for a direct subsidized loan by completing the FASFA and CSS. These loans from the federal government do not begin to accrue interest until after you have graduated or left college but do require you to show financial need.
Subsidized loans generally have lower interest rates. For example, between July 1st, 2016 and July 1st, 2017, the APR for an undergraduate direct subsidized loan is 3.76%. After July 1st, this rate may change for new and future loans, but it will be fixed for the life of the loan you accepted prior.
APR for Direct Unsubsidized Federal Loans
Like direct subsidized loans, an unsubsidized federal loan can be granted by completing FASFA. However, while you do not need to prove financial need, interest will begin to accumulate immediately and will build upon the principal amount of the loan. This makes knowing your APR even more important for unsubsidized loans.
For undergraduates, the fixed APR for July 2016 to July 2017 is the same as the direct subsidized: 3.76%. Graduates can expect a rate of 5.31%.
APR for Direct PLUS Loans
Another federal loan your family may take out is the Direct PLUS loans. These are only granted to parents, graduate students, or professional students. Their fixed rate for the life of the loan is currently 6.31%.
APR for Private Loans
If federal loans aren’t enough to cover the cost of college, many students can choose to pursue private loans. These will often require a co-signer, which may be a parent, guardian, or someone else. The APR offered is set by the institution, usually a bank or credit union.
Interest rates for private loans will vary from applicant to applicant, depending on yours and your cosigner’s credit score, income, and other factors. You can also choose from variable and fixed rates.
Before accepting a student loan, whether federal or private, it’s extremely important to look beyond the principal loan amount. Knowing how much you will owe at the end of your four years or more at college will help make it clear whether taking the offered loan and APR is worth it to your family and future self. It may even help you set a budget to pay off your student loans, starting with day one.
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