Interest

Interest is the cost of borrowing. When you borrow a federal student loan you are using federal funds for a period of time, and that use has a cost associated with it.

To better understand the effects of interest, you should know your principal balance. The principal balance is the original amount you borrowed, plus capitalized interest, less any principal payments.

There are different types of interest that can affect your student loan:

Fixed interest
Variable interest
Simple interest
Accrued interest
Capitalized interest

Fixed interest rates do not change. Subsidized Federal Stafford Loans borrowed by undergraduates between July 1, 2008 and June 30, 2009 have a fixed interest rate of 6.0%.  Unsubsidized Federal Stafford Loans borrowed on or after July 1, 2006 as well as subsidized Stafford Loans borrowed by graduate students have a fixed interest rate of 6.8%. The fixed rate for Federal PLUS Loans (for parents and for graduate students) is 8.5%.

Variable interest rates are tied to a certain index (depending on the type of loan and when it was received) and change periodically as the index changes. Student loans borrowed prior to July 1, 2006 had variable interest rates. If you have a variable rate loan and need to identify your current interest rate, use the Interest Rates Chart.

IMPORTANT! Your initial interest rate will be indicated on your notice of loan guarantee. Your loan holder will inform you of any interest rate changes during the repayment period for your loan.

QUICK TIP:  Some loan holders and secondary markets offer interest rate reduction programs if you: Make your payments on time each month, Agree to have payments automatically withdrawn from your checking account, or Meet other criteria. Example: Missouri Higher Education Loan Authority (MOHELA), the secondary market for the Federal Family Education Loan Program in Missouri, may offer interest rate reduction. Contact your school's financial aid office, MOHELA, or your loan holder for more information.

Simple interest is calculated only on the principal balance of your loan.

Accrued interest is calculated on your unpaid principal balance each day. The formula for calculating interest is:

Daily interest = (Annual Interest Rate/365.25 days) X Unpaid Principal Balance

Example: Interest accrual based on a $2,625 loan with an annual interest rate of 9 percent Daily interest = (.068 / 365.25 days) X $3,500 = $.65160848733 per day

Capitalized interest is unpaid, accrued interest that is added to the principal balance of your loan. When interest is capitalized, your total debt increases. It is very important to make interest payments on unsubsidized Federal Stafford Loans, even when you are not required to (e.g., when you are enrolled in school at least half time or during your grace period or authorized periods of deferment). By making interest payments, you can save yourself a considerable amount of money over a standard 10-year repayment period.