Who Sets the Interest Rates for Student Loans?

Posted By Law Office of Simon Goldenberg, PLLC || 15-Nov-2016

When you receive a private or federal student loan, you will be required to pay back the principal amount of your loan plus interest, or a certain percentage of the amount that you borrowed. Since interest rates will greatly impact the amount you will eventually have to pay, it is important you known who sets your interest rate, how interest is calculated, and any fees that will be associated with your loan.

Direct Loans vs. Private Student Loans

Direct Loans from the United States Department of Education have interest rates that are determined through legislation according to financial markets, with new interest rates being determined every spring for the upcoming academic year. All interest you pay on these loans goes directly to the U.S. Treasury and cannot be changed by your loan servicer.

Types of direct loans include:

  • Direct subsidized
  • Direct unsubsidized
  • FFELP Unsubsidized
  • Direct PLUS loans
  • FFELP PLUS loans

Although loans under the Federal Family Education Loan Program (FFELP) are no longer being made, these loans were also subject to a congressionally-determined maximum interest rate which stayed consistent throughout the life of the loan. Generally speaking, undergraduate students are charged the least, while graduate and professional students are charged more.

Private loans, on the other hand, have interest rates that are established by the lender that made the loan and are primarily based on your credit history and that of your cosigner, if you have one. Depending on the contract you sign at the beginning of your loan, these interest rates may be variable or fixed. In some cases, private lenders may offer borrower benefits which allow you to achieve a lower interest rate, such as paying consistently or setting up a recurring automatic pay system with your bank.

What Is Capitalized Interest?

If your loan is set up to where you accrue interest while you are in school, such as with a Direct Unsubsidized or private loan, you will have capitalized interest if it is unpaid. In other words, you will have to pay interest on both the principal amount and on the interest that has already accumulated. Paying off the interest during college can minimize this effect and allow you to start to pay off the original balance minus any fees upon graduation.

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Unfortunately, student loans are often one of the many reasons why Americans find themselves struggling under mountains of debt. If you have found yourself in financial straits due to overwhelming student loans with seemingly no way out, contact the knowledgeable New York debt relief lawyers at The Law Office of Simon Goldenberg, PLLC today. With aggressive legal guidance and an unshakable dedication to preserving your rights, our trial-tested advocates can guide you step-by-step towards the effective solution you need to get back on track towards financial freedom.

Get in touch with us online today to discuss your situation in detail.

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