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How Much is Your Student Loan Costing You?

Student loans are one of the largest sources of debt many people deal with in their lives, besides a mortgage. And it’s not always immediately clear how much the loans will cost you over the course of your loan term.

Student loans are one of the largest sources of debt many people deal with in their lives, besides a mortgage. And it’s not always immediately clear how much the loans will cost you over the course of your loan term.

In 2020, American students saw their student loan debt reach $37,584 on average. According to the Federal Reserve Bank of New York, students collectively owe almost $1.6 trillion.

If you’re wondering how much your student loans are really costing, the first step is to work out your average interest rate with a daily interest formula.

What is the average interest rate for student loans?

The average interest rate for student loans in 2021 is:

For federal student loans:

  • 75% for undergraduate students
  • 30% for graduate or professional students

For private student loans, there is a range of different products and interest rates which vary more than they do for federal student loans.

The average interest rates for private student loans are:

  • 17% for a 5-year loan
  • 64% for a fixed-rate 10-year loan

Overall, private student loan rates can start from as little as 1.25% for variable-rate loans, and 4.25% for fixed-rate loans. This depends on a variety of factors such as your choice of lender, your credit rating, the loan term, and the general interest rates.

How to calculate student loan interest

Grab a calculator and do the following calculation to find out your daily and monthly interest rates. 

To find your daily interest rate, divide your annual student loan interest rate by the number of days in the year.

To find the amount your loan accrues each day, simply multiply your outstanding principal balance by your daily interest rate.

After this, you can calculate your monthly interest payment. Just multiply your daily interest rate by the number of days since your last payment. 

This will give you a clearer idea of how much your student loan is costing you each month in interest alone.

How to save money on your student loans

With all that debt hanging over your head, is there any way to make it sting a little less? Here are some ways to save money on your student loans.

Borrow less.

This is easier said than done of course, but before you apply, consider any way you can borrow less. For example, you could commit to saving as much as possible before you head to college. The aim is to get the amount you need to borrow as low as possible to save on interest. 

Look for loan discounts.

When applying for a loan, shop around as much as possible because many lenders will not provide transparent pricing or interest rates online. 

While doing your research, try to find those lenders that offer discounts, for example, an auto-debit discount can reduce the interest rate by 0.25 to 0.50%. It may not sound like a lot but over the course of your loan, it could make a huge difference. 

Some lenders will also offer discounts for people who pay on time or those who graduate on time.

Refinance your existing loan.

If you already have a student loan that is weighing heavy on you, refinancing is an option to consider. In this case, you can refinance your high-cost loans to a lower interest rate once you’ve managed to knock a chunk of your loan off. 

While preparing to refinance, make sure your credit score is in order. Some people are hit with high-interest rates when they first take out a loan due to a low or non-existent credit score. 

However, if you have been making payments on time for several years, you might find that your score is much better now. If it is better, then refinancing can help you get a lower rate. 

Pay as much as you can afford. 

It may seem counter-productive but paying off as much as you can each month or making early repayments can shave years off your loan term. This can save you a considerable amount in interest fees in the long run.

There are usually no prepayment penalties for federal or private student loans, so this is worth considering if you want to clear your debts faster.

Switch to an income-based repayment plan

If you have a federal student loan, you will usually be eligible for an income-based repayment plan. This can reduce your monthly payments; however, it often takes longer to pay off the loan, meaning you pay more interest overall. 

It may still be worth it for now if you need to free up the cash. But think carefully before going down this route. 

Student loans can be a tricky thing to navigate. There are several things you can do to either reduce monthly payments or reduce the amount of interest you owe overall. Whatever option you choose, shop around, do your research, and do the math to find the best solution for you. 

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