Aug 11 · 3 min read
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Student loan interest rates and fees are often overlooked. While they might not seem like a lot in the beginning, the interest and fees associated with student loans can greatly increase the amount of money you’ll eventually have to repay. In order to minimize the amount of money coming out of your pockets, you’ll want to get whyze and truly understand the details of student loan interest and fees.
Let’s start with student loan fees first. If you use federal student loans to pay for school, you’ll have a loan origination fee for each loan you take out. This fee will be taken directly from your student loan before it is even disbursed to you.
As an example, if you take out a $5,000 unsubsidized loan in 2019, it will come with a 1.062% loan origination fee. Before the loan is even sent to you, it will be decreased to $4,919. This is because the loan origination fee of $81 will be taken out first. And to make things worse, even though you only received $4,919, you will still have to pay back the entire $5,000 loan plus interest.
Student loan origination fees will vary depending on the type of student loan and when it was sent to you. Direct Subsidized and Direct Unsubsidized Loans typically have loan fees around 1% while Direct PLUS Loans have fees around a whopping 4%.
Private student loans may have loan origination fees as well. Since private student loans aren’t part of the federal student loan program, private lenders can charge whatever fees they like. While the best private lenders don’t charge student loan origination fees, you’ll want to check for other hidden fees.
Despite the fact that loan origination fees eat away at your funds, they aren’t the main reason student loans get out of control. That can be attributed to student loan interest. Fixed interest rates on federal student loans generally range between 3-8% while private student loans range between 4-14%.
These interest rates are dangerous due to a concept called compound interest . In a nutshell, the interest on a student loan is calculated and added to the total balance of that loan on a daily basis. This allows interest to “compound” on itself and grow at an accelerated rate. Let’s look at an example to truly understand this concept. Let’s say it’s your freshman year and you accept a $10,000 Direct Unsubsidized Loan with an interest rate of 5%. If you make no payments on this loan over the next year like most college students, your loan balance will grow to $10,513. If you’re good at math, you may be thinking “wait a second,isn’t $513 more than 5% of $10,000?” Well, you’re absolutely right. Since interest on student loans is compounded daily, you’ll actually be charged 5.13% in interest.
While you may be thinking $513 in interest isn’t that bad, let’s look at what happens to this student loan over the next three years of college. If you continue to make no payments on your student loans, your original $10,000 will compound to $12,214 before you even graduate! And that’s on top of the fact that you didn’t even receive the full $10,000 due to the loan origination fee.
Because of student loan interest and fees, you’ll want to take as many Direct Subsidized Loans as you can. Direct Subsidized Loans have the benefit of the federal government paying the interest on these loans while you’re at least a half time student. Even after you leave school, the government will pay the interest on these loans during the 6 month grace period.
If you have to use any other type of student loan, make sure you get whyze and understand how interest and fees affect your loans. Make loan payments while you're still in school if you can and pay more than the minimum on your loans if you're out of school. This will slow down the growth of your student loan.