Clearly marked APRs help consumers shop for a mortgage and compare lenders.
In the world of student loans, APRs show up inconsistently and often confuse borrowers and prospective borrowers.
Fortunately, it is relatively simple to clarify the APR vs. interest rate issue. This basic understanding makes it easier to compare lenders and plan your repayment strategy.
APR stands for annual percentage rate. APRs include the base interest rate, plus annualized fees and costs associated with a loan. The purpose behind an APR is to help consumers compare lenders.
For example, two lenders might offer loans with 3.00% interest rates. However, one lender might charge many fees while the other lender doesn’t have any fees. Both lenders would have the same nominal interest rate, but the lender charging high fees would have a higher APR.
Consumer protection laws, like the Truth in Lending Act, require disclosure of loan APRs in many different circumstances.
Do Student Loans have an APR?
For many student loans, there isn’t a difference between the APR and base interest rate.
This is because most lenders don’t charge any loan origination fees or other costs associated with the loan. The only expense to the borrower is the interest. Thus, a student loan with an interest rate of 5.99% often has an identical APR of 5.99%.
In the past, many private loan lenders and refinance companies charged loan origination fees. However, we have now reached a point where nearly every reputable lender has eliminated these costs.
The big exception is federal student loans…
Federal Student Loan APRs
Federal student loans do have origination fees. The fee depends upon the loan type, and the year the student borrowed the loan. These fees are not charged immediately to the borrower. Instead, they get added to the loan balance from day one.
For example, if you borrow a $10,000 Parent PLUS Loan this year, it has an origination fee of 4.228%. The borrower would receive $10,000 to pay for college, but the starting balance of the loan would be $10,422.80.
The government doesn’t prominently display APRs for federal student loans. Instead, the government lists the base interest rates.
The government’s lack of an APR disclosure isn’t an attempt to mislead consumers. Calculating an APR on a federal loan is challenging because there are so many different repayment plans and the federal government.
However, despite these challenges, we can still get a pretty good idea of the APR on federal loans:
|Loan Type||Listed Interest Rate||Origination Fees||10-Year APR*||25-Year APR*|
|Direct Subsidized and Unsubsidized Loans for Undergraduates||3.73%||1.057%||3.952%||3.829%|
|Direct PLUS Loans||6.28%||4.228%||7.210%||6.728%|
* The listed APR are estimates based upon the loan repayment length. Your repayment plan will impact the final APR. Interest rates used are based upon Fall 2022 loans.
Do origination fees mean it is a bad idea to borrow federal student loans? It would certainly be better if the government stopped charging origination fees or offered lower interest rates. However, federal student loans are still the best option for the overwhelming majority of borrowers.
Federal loans have a variety of perks and borrower protections that private lenders don’t offer. For this reason, most borrowers should opt for a federal loan, even if it means a higher interest rate and APR.
What is a good APR for student loans?
Determining whether or not the APR on your student loans is “good” is purely subjective.
For one borrower, a 4.5% APR loan might be excellent. For another borrower, it could be terrible.
Whether or not your interest rate is good depends upon the process used to get the loan. If you signed up for the very first loan offered and did zero research, the odds are pretty good you have a bad APR. If you shopped around to find the best rate available, your APR is probably pretty good.
The APR analysis changes for the borrowers in repayment. Once you finish school and find a job, you are much less of a credit risk than when you were a student. People in this position can often refinance their loans to get a lower interest rate and/or lower monthly payments.
Lowering Student Loan Interest Rates
This site keeps a comprehensive list of available options to lower student loan interest rates.
For private loan borrowers who have graduated and found a job, the most savings is usually available via a refinance.
As of June 2023, the following lenders offer the lowest interest rates:
|Rank||Lender||Lowest Rate||Sherpa Review|
|T-1||4.99%*||Splash Financial Review|
|T-1||4.99%||Laurel Road Review|
Note: because these lenders do not charge origination fees, the APR and interest rates are the same.