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Paying for College

Word of the Day Wednesday: Interest Rate

Learn what a student loan interest rate is, when it is set each year, and how it may impact you.

Each Wednesday, MEFA features a Word of the Day, where we highlight a word (or sometimes a phrase) related to the college planning process. This month, we're focusing on vocabulary related to Federal Direct Student Loans.

Today's Word of the Day is Interest Rate.

The interest rate on Federal Direct Student Loans is the percentage of the loan amount charged to the borrower for the use of funds. The interest rate for Federal Direct Student Loans is set each May for the upcoming academic year's loans and can differ from year to year. Some years it may be higher than the previous year, and some years it may be lower. So it is possible — and even likely — that a student who borrows a loan for each year of college may have four different interest rates when he or she graduates. Currently, and for the past several years, the interest rate on Federal Direct Student Loans is fixed, meaning the rate remains constant for the lifetime of the loan, and the monthly repayment amount will never change. 

Federal Direct Student Loans fall into two different types, subsidized and unsubsidized. Though the interest rate is the same for both, the timing for when the interest begins accruing (accumulating) is different. The interest on unsubsidized loans begins accruing as soon as the student receives the loan funds (though it isn't due until repayment begins). Subsidized loan interest doesn't begin to accrue until 6 months after the student leaves school or graduates.

Why does this matter to you?

If you're a student borrowing Federal Direct Student Loans, it's important to understand the full cost of the loan. The interest rate will impact that amount. Remember, you'll need to pay back every dollar you borrow, plus interest. For more information about Federal Direct Student Loans and their interest rates, visit the Federal Student Aid website.







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