What determines how much interest you pay?
Updated on September 11, 2020
You’re probably wondering how much interest you’ll pay on your student loans. Student loans can accrue a significant amount of interest over the years, but the precise amount that you pay will vary significantly from one lender to another. Here are a few things that factor into the amount of interest that you’ll pay:
1. Your credit score
If you have a good credit score, you will have access to lower interest rates than you would otherwise, which will reduce the amount that you pay in interest over time. However, borrowers with poor credit scores will be stuck with higher interest rate student loans as they’re considered a greater risk.
2. Lenders vary considerably in terms of the interest they charge
The lender that you choose will play an important role in determining the interest rate that you pay on student loans. The interest rates offered by lenders can depend on the economy as well. Rates are currently low due to the pandemic, but they could increase over time. Keep in mind that your interest rate will remain the same throughout the term of your loan, which means that locking in low-interest rates now could be a wise decision.
3. Federal loans have lower interest rates
Federal student loans tend to have lower interest rates than private ones. Federal student loans are offered to individuals who meet the income requirements that are set by the government. However, federal loans do not come directly from the government, which means that rates can vary somewhat from one lender to another.
4. Longer-term loans will result in more interest accruing
If you choose an income adjusted repayment plan or another repayment plan that lets you pay off your loans over a longer period of time, you will pay more interest. However, paying off your loans over a shorter period of time can result in less interest accruing overall. Due to the fact that interest accumulates over time, it is possible to pay off your student loans early.