Posted by Karen Munoz, EA

Interest on Student Loan

Interest on Student Loan

Student loan interest stands out for having a lower rate, which might be attractive to many. However, there are still a couple of things to know if you consider taking a student loan. 

Effect of Covid 19 on the Economic System 

Almost every country and economy of the world felt the COVID 19 pandemic's impact, and many countries, including the US, might take a while to recover. Many students are filled with uncertainty about whether to continue or start their program. While circumstances keep changing, we have a couple of answers.

Debt Relief Options for Student Loans 

The CARES Act (Coronavirus Aid, Relief, and Economic Security Act) made the federal loan interest 0% for 30th Sept 2020, in which all borrowers automatically enjoyed administrative forbearance. This allowed them to pause payment of student loans till 30th Sept 2020.

There was an executive order from POTUS to extend the temporary suspension through to Dec ending. Every month the payment was suspended, it will be classified as a qualifying payment for borrowers who are after forgiveness with the PSLF (Public Service Loan Forgiveness) program.

Is Taking a Student Loan Advisable?

While the rate for Federal Student loans is pretty low, it makes this period the best time to take a student loan. It is good to exhaust your available options for a federal student loan by employing the Free Application for Federal Student Aid (FAFSA) and finding out about top loans from private schools. Whatever loan you choose, make sure it is what you can afford to pay back. 

It should not be above what you can afford to repay in the first year after school if you take a student loan. People with a private student loan should consider refinancing.

Calculation of Interest Rate Student Loan

The ten-year treasury note action determines a federal student loan's interest rate, which happens with a cap in May. 

  • Undergraduate Unsubsidized Loans: Treasury (10 years) +2.05% (8.25% cap)

  • Graduates Unsubsidized loan: Treasury (10 years) +3.60% (9.50% cap)

  • Plus loan (Direct): Treasury (10 years) +4.60% (10.50% cap)

The lender determines the interest rate for a student loan using a basis of market factors alongside the creditworthiness of the co-signer. Also, a lot of private lenders have interest rate options that vary.

Even though credit score and income are not a basis for such loans, a private lender does consider them. As a result, the inability to meet the lender's requirement might warrant a co-signer. Even people without a good credit score who could not get a co-signer could opt for student loans without cosigner or loans for bad credit. 

Interest Rate on Student Loan

One of the effects of the COVID 19 pandemic is setting the treasury rate at a record low. This caused a drastic drop in federal student loans that started from 1st July 2020. 

  • Direct for Undergraduate (both Subsidized and Unsubsidized Loan): 2.75%

  • Direct for professional borrowers and graduates (Unsubsidized Loans): 4.30%

  • Direct for Graduates, parents, and professional students (PLUS Loans): 5.30%

The federally subsidized and unsubsidized loan (direct) comes with an origination fee placed at 1.059%, while the Parent plus loan is set at 4.236%.  While you will not pay these fees as part of the repayment, they will be deducted from the initial loan.

There is a range of interest loans for private lenders. Your creditworthiness, alongside that of your co-signer, determines the exact rate. The value as of Oct 2020 for a private student loan is set below:


Type of Loan 

Fixed APR

Variable APR


4.49% to 11.93%

2.14% to 11.20%


5.15% to 11.36%

2.57% to 11.41%


3.43% to 7.16%

2.67% to 6.85%


Since it has been made known that the funds' rate at the federal level will be kept close to zero by the Federal Reserve, there is a low probability that the interest rate from the private firm will increase.



Karen Munoz, EA
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