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Paying for College

The Federal Student Loan Interest Rate: What It Is & How It Works

The Federal Student Loan Interest Rate - What It Is & How It Works

As the first person in my family to attend college in the United States, right after completing high school in the Caribbean, navigating Federal financial aid that offered me a menu of mostly student loans, was very confusing.

After signing up for Perkins, subsidized and subsidized Stafford student loans, I had no idea how interest rates were set, or that the loans were issued the same calendar year could have different fixed interest rates.

It was only after I transferred from my private university (to get off of the path to $100,000 in student loan debt) and I started to educate myself about student loans, was when I realized that the interest rate on the student loans I took out every semester, could vary over the course of my college career.

By the time I graduated from college in 2007, the annual interest rates of my Federal student loans varied from 2.77% to 6.8%, depending on which semester each loan was initiated.

In this post, I’ll go over how the annual interest rates for Federal student loans work.

Federal Student Loan Interest – What It Is

First, understand that the interest rate for a Federal student loan is defined as the money charged by the lender (i.e. the U.S. Department of Education in the case Federal student loans ) in exchange for borrowing money expressed as a percentage. The interest rate for each Federal student loan is fixed for its lifetime.

Federal Student Loan Interest – Who Sets The Rate

The interest on Federal Direct subsidized, unsubsidized and Plus student loans are set by the U.S. Congress at fixed rates over the life of each loan. As prescribed by the Higher Education Act of 1965, new interest rates for Federal Direct student loans are established July 1st of each calendar year.

The formula for those interest rate is as follows:

Federal Student Loan Interest Formula:
10-year Treasury Note Index + Add On Amount = Student Loan Interest Rate

Where: The 10- Year Treasury Note Index: is the high yield of the 10-year Treasury note at the final auction held prior to the June 1 preceding the July 1 of the year the new student loan rate will be effective. This index is announced on the US. Department of Education’s Office of Federal Student Aid Information for Financial Aid Professionals website.

Note: A Perkins student loan has an annual interest rate 5% regardless of the loan initiation date and is not dependent on the high yield of the 10-year Treasury note. Perkins Loans are backed by the U.S. Department of Education program where a student can borrow directly from their college and university.

Congress also defined what the “Add On Amount” would be, based on the type of Federal student loan and who is borrowing the funds (i.e. an undergraduate student, a graduate or professional student or a parent). These Add On Amounts are summarized in the table below.

ADD ON AMOUNTS FOR FEDERAL DIRECT STUDENT LOAN INTEREST RATES

LOAN TYPE

  • Subsidized & Unsubsidized
  • Unsubsidized Loan
  •  Plus Loan

BORROWER

  • Undergraduate Student
  • Graduate Student
  • Parent, Graduate or Professional Student

ADD ON

  • 2.05 %
  • 3.60 %
  • 4.60 %

=

In summary:

  • The rate is set by Congress as prescribed by the Higher Education Act
  • The interest rate is calculated using a formula based on the 10-Year Treasury Note Index and an Add On Amount
  • The 10-Year Treasury Note Index can change every year
  • The Add On Amount depends on the type of student loan and who is borrowing the funds

This is how the student loan interest rate is set, using all these variables.

[clickToTweet tweet=”Here’s How Federal #StudentLoan Annual Interest Rates Are Set & Change Every Year #StudentLoanAnswers” quote=”How Federal Student Loan Annual Interest Rates Are Set & Can Change Every Year” theme=”style2″]

Federal Student Loan Interest Rate – What Are The Current Rates

The 10- Year Treasury Note Index used to set Federal student loan interest rates effective as of July 1, 2017 was  2.40% (Source: ifap.ed.gov/eannouncements).

Based on the Federal Interest Rate Formula, the interest rate for Federal student loans disbursed between July 1, 2017 through and June 30, 2018 can be easily calculated using the interest formula.

Federal Student Loan Interest Formula:
2.40% + Add On Amount = Student Loan Interest Rate

By plugging in the Add On Amounts, defined in the previous section, into the Federal student loan interest rate formula, the resulting fixed annual interest rates are presented in the table below.

FEDERAL STUDENT LOAN INTEREST RATES
(For Loans Issued between July 1, 2017 & June 30, 2018)

LOAN TYPE

  • Subsidized & Unsubsidized
  • Unsubsidized Loan
  •  Plus Loan

_

BORROWER

  • Undergraduate Student
  • Graduate Student
  • Parent, Graduate or Professional Student

INTEREST

  • 4.45 %
  • 6.0%
  • 7.0 %

Federal Student Loan Interest – How The Change In Interest Rates  Affect You

When the Federal student loan interest rates change, they affect the cost of loans issued after July 1st of the year the change goes into effect. This means that any student loans issued prior to July 1st, won’t change and will remain fixed, whether you are a current student or a long time graduate.

For current undergraduate, graduate and professional students or parents, planning to sign up for Federal student loans after a rate change, the new rates will apply only to those newly disbursed loans (between July 1, 2017 and June 30, 2018).

It’s easy to understand how the fact that interest rates on Federal student loans that not only vary by the type of loan and who is doing the borrowing the money but also change from year, can cause so many student loan borrowers and parents to be confused about how much they can expect their student loans to cost them, after graduation.

Still, if you are a borrower, taking the time understand the debt you signed up for is essential to get rid of them, as soon as possible.

How much did you know about how Federal student loan interest rates are set?

I hope you found this breakdown useful.

~ Melisa Boutin

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College Students: Win $10,000 for Your Social-Business Idea From CommonBond

CommonBond Social Impact Award for College StudentsThe CommonBond Social Impact Award, in partnership with Pencils of Promise, is offering a $10,000 cash prize to fund a top undergraduate entrepreneur, with a business idea that drives social good. Current college students are welcome to apply and will receive coaching on how to write a business plan, generate revenue and pitch to investors from Techstars.

Selected finalists, will get the opportunity to showcase socially-minded business ideas, and pitch to a panel of judges who include: Grammy Award-Winning artist, Lil Jon, CEO & Co-Founder at Pencils of Promise, the Co-Founder at Birchbox and CEO & Co-Founder at CommonBond.

In addition to the $10,000 cash prize, the winner will receive expert startup coaching from CommonBond‘s leadership team.

Award Eligibility

To be eligible, applicants must:

  • Be currently enrolled in a not-for-profit college or university.
  • Have a business or business idea, must drive positive social impact.
  • Have business or business idea that is for-profit.
  • Be able to travel to NYC in July 2017.
Note: You don’t have to be in business already to apply.

[clickToTweet tweet=”College students! Showcase your social business idea & get a chance to win $10k from @CommonBond!” quote=”Win $10,000 for your social business idea as a college student from CommonBond” theme=”style2″]


Application Deadline

The application for the award is due May 31st.


Related: More Scholarships for U.S. & Caribbean Students

Where To Apply

The application can be found on the Social Impact Ward website, HERE.

Learn more information about CommonBond’s Social Impact Award opportunity, the application and evaluation process, HERE.

Good luck and share this post to spread the word!

~ Melisa Boutin

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Featured – Talking Student Loans, Debt Payoff & Money Mindset on Clever Girls Know Podcast

Clever Girls Know Podcast Interview - Melisa Boutin

I had a fun chat with Bola Onada Sokunbi on her Clever Girls Know Podcast about money mindset, student loans, debt pay off strategies and more.⠀

We talked about how stressful facing large student loan debt can be, the confusing process of navigating debt pay off, my philosophy on how the only good debt there is one you don’t owe, my favorite personal finance book and my own Clever Girl Super Power!

[clickToTweet tweet=”‘The only good debt is one you don’t owe’ @CleverGirlCGF’s Clever Girls Know Podcast” quote=”Melisa Boutin on ‘good debt’ vs ‘bad debt’ on Clever Girls Know Podcast” theme=”style2″]




Take a listen, and follow me on Soundcloud to hear more about paying for college, getting rid of debt and pocketing lender profits for yourself at soundcloud.com/melisaboutin.

Happy listening!

Melisa Boutin.

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Out-of-State Tuition Waivers for Caribbean International Students From The Florida-Caribbean Institute

Florida Caribbean Institute Out-of-State Tuition Waiver for Caribbean International StudentsThe Florida Caribbean Institute (FCI)  offers renewable Out-of-State Tuition Waivers for Caribbean International Students who have been admitted or meet the requirements for admission to any university or community college of the public education system of the State of Florida. Out-of-State tuition waivers can represent a 60% discount on tuition international students pay.

A limited number of these waivers are available, so run, don’t walk, if you are eligible to apply.

Scholarship Eligibility

To be eligible, applicants must:

  • Be an international student with a F1, or J1 visa.
  • Be fully admitted to a state college or university.
  • Have at least a 3.0 or higher GPA.
  • Be a citizen of the Caribbean from:
    – Antigua and Barbuda, Bahamas, Barbados      – Belize, Dominica, Dominican Republic          – Grenada
    – Guyana, Haiti, Jamaica, St. Kitts and Nevis     – St. Lucia, St. Vincent and the Grenadines               – Trinidad and Tobago 
  • Be committed to returning to your Caribbean country after the completion of your studies, for a length of time equal to their exemption period, as required.

[clickToTweet tweet=”Tuition Waiver For Caribbean International Students at Florida community colleges & universities!” quote=”Check out this great funding opportunity for Caribbean International Students!” theme=”style2″]


Application Deadline

All applications for this out-of-state tuition waiver opportunity are due June 1st.

The application can be downloaded, HERE and submitted by mail to:

FLORIDA-CARIBBEAN INSTITUTE (FCI)
Kimberly Green Latin American and Caribbean Center
Florida International University
11200 SW 8th Street
Modesto A. Maidique Campus
DM 353
Miami, FL 33199
Phone: (305) 348-2894
Fax: (305) 348-3593


Related: More Scholarships for U.S. & Caribbean Students

Where To Apply

For more information on the out-of-state tuition waiver and additional details on how to apply, visit The Florida International University Kimberly Green Latin American and Caribbean Center, funding opportunities, webpage, HERE.

Good luck and share this post to spread the word!

~ Melisa Boutin

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Student Loan Interest & Capitalization: What It Is & How It Works

Student Loan Interest and Capitalization - What it Is And How It Works | Your Money Worth Blog

Both the U.S. Federal Government and Private lenders, make money on student loan debt by charging borrowers interest on the loaned funds.

The interest rate alone, though, does not take into account accrued interest that can be capitalized on a student loan and increase profits for the lenders at borrowers’ expense. And, if you are one of the millions of student loan borrowers, this means extra costs for you.

In this post, I breakdown, what student loan interest is, how it accrues on your student loan, who is responsible for it and when, what happens after accrued interest is capitalized and how to avoid capitalization.

Student Loan Interest

The interest rate on your student loan is the amount charged on the loan, expressed as an annual percentage of the loan principal balance. You can determine the annual interest rate for your student loan from your loan promissory note.

Note: The Student Loan Promissory Note: is a legal document you sign, agreeing to repay your loan, accrued interest, and fees to your lender. Terms and conditions related to whether the interest is variable or fixed, how interest is calculated, when interest is charged, capitalization, repayment requirements and deferment options are also included in this document.

Although your loan annual interest rate tells you the amount of interest that will be charged as a percentage, the rate alone does not tell you how it will be charged. That’s where interest accrual comes in.

[clickToTweet tweet=”Student loan annual interest rate does not tell you how it will be charged. Interest accrues daily” quote=”Your annual student loan interest rate doesn’t tell you how it will accrue” theme=”style2″]

Interest Accrual – When It Starts

The first thing to know about interest on your student loan is that:

  • It starts to accrue with the first disbursement transaction on your student loan;
  • It accrues up on a daily basis; and,
  • It never stops accruing until the loan is paid off, discharged, forgiven, canceled or otherwise settled.
Interest Accrual – How It’s Calculated

Next, you’ll need to be aware that the amount of interest that accrues on your loan is determined by the accrual period (in days), the daily interest rate factor, and the outstanding principal balance, as follows:

Interest accrued = daily interest rate factor x accrual period x outstanding principal balance

Where:

Daily interest rate factor = annual interest rate/ 100/ 365 days
Accrual period = number of days over which interest will be calculated
Principal balance = the outstanding loan amount owed

As an example, let’s assume a borrower named Zara has a private student loan with a 10% annual interest rate, a current principal balance of $10,000. She recently put her loan in deferment for a 6-month (180-day) period. The amount of interest that will accrue during that time can be calculated using the formula.

Find:

The amount of interest that accrues during the 180-day deferment period.

Given:

Daily interest rate factor = (10/100) / 365 days = 0.10/365 = 0.000274
Accrual period = 180 days
Principal balance = $10,000

Solution:

Interest accrued = 0.000274/day x $10,000 x 180 days
= $493.15

For your own student loan, you can use this formula to figure out the amount of interest that will accrue, over any period of time.



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Interest Accrual – Who Pays for What & When

Because student loans aren’t already complicated enough (*insert sarcasm here*), who is responsible for the interest that accrues depends on the stage of your student life loan cycle  and the type of student loan. The next two figures show who is, typically, responsible for the interest that accrues for these loan types:

  • Private Student Loan
  • Federal Unsubsidized Student Loan
  • Federal Perkins Student Loan
  • Federal Unsubsidized Student Loan
  • Federal Plus Student Loan
  • Federal Consolidation Loan
Who Pays Interest Accrued During the In-School, Grace & Deferment Periods

Who Pays Interest and Capitalization on Student Loans In School, Deferment and Grace Periods


Related Article: The Student Loan Life Cycle; What Is It & How It Works

Who Pays Interest Accrued During the Forbearance & Repayment

Who Pays Interest and Capitalization on Student Loans during Frobearance and Repayment

At every stage of the Student Loan Life Cycle, (In-Shool Period, Post Graduation Grace Period, Deferment Period, Forbearance Period or Repayment Period)  the interest that accrues on your loan is either the responsibility of you and your co-signer(s) or the Federal Government.

From the figures you can see that:

  • The Federal government does not pay the interest on all the different types of student loans it offers.
  • The interest accrued on private student loans (including Caribbean Student Loans) is your (the borrower) and any co-signers’, responsibility.
  • When you consolidate your student loans the responsibility for the interest will be determined by the promissory note for the new loan that replaces the older loans.
    • For consolidation done through the Federal government (for Federal student loans only), this may require you to forfeit the grace period and cause your loans to enter repayment, immediately.
    • Note: If you consolidate your student loans (private and/or Federal), with a private lender, the responsibility for the interest accrued will be the responsibility of the borrower(s).

This can be very confusing, I know.

But you need to know this because, as a borrower, even if:

  1. No one explained this to you;
  2. You don’t receive a statement or notice on the interest that accrues;
  3. You don’t pay attention to notices or statement that detail the interest that builds up on your student loan; or,
  4. Your lender doesn’t require you to make payments on your loan interest;

The interest you are responsible for will be included in the balance you owe and what you are expected, and legally required, to repay to your lender.

Note: Check with your student loan promissory note for specific terms and conditions related to accrued interest. The agreement you signed with your student loan lender will determine who is responsible for the accrued interest and under what circumstances.

Another reason this is important to know is because interest accrues and builds up on your student loan, it can be added to your loan principal balance is through the process of capitalization.


Related Article: How I Paid Off $37,000 if Student Loan & Credit Card Debt, & Bought A Home In 5 Years

Capitalization

Capitalization involves the addition of unpaid accrued interest to the principal balance of your student loan. It usually takes place when unpaid accrued interest builds up on your student loan, during the in-school period, or a period of deferment or forbearance. And, even if you might not have been required to make payments during those periods, the interest is still your responsibility.

Capitalization – How it Works

Using the example of Zara’s private student loan, again, let’s assume that at the end of her 180-day deferment period, she never gave much thought to the interest that accrued on her loan and at the end of the deferment period, her lender capitalizes the interest. The capitalization of her loan could be calculated.

Find:

New principal balance after capitalization of interest accrued during deferment.

Given:

Principal balance at start of deferment = $10,000
Interest accrued during deferment = $493.15

Principal balance after capitalization = Principal balance at start of deferment + Interest accrued during deferment

Solution:

Principal balance after capitalization = $10,000 + $493.15 = $10,493.15

After the interest is capitalized on Zara’s loan, her new principal balance is almost $500 higher than before the deferment.

Many students are totally unaware (like I was) of the amount of accrued interest building up during these stages of their student loan life cycle, and are surprised when their principal balance at the start of repayment (or after a period of deferment or forbearance) is higher than the original amount borrowed.

Capitalization of the interest accrued is usually the culprit, and from that point forward you will pay a higher amount of interest.

In simple terms, when unpaid accrued interest is capitalized on your student loan, you pay compound interest to your lender, i.e. interest-on-interest.

If you have student loans already, or you are considering relying on some amount for your education, I want you to use this information understand how interest builds up on your loans and avoid capitalization of interest, altogether.

[clickToTweet tweet=”Capitalization means paying interest on interest to your student loan lender” quote=”Capitalization means you pay interest on interest to your lender” theme=”style2″]

Capitalization – How To Avoid it

Although there is nothing you can do about the fact that that interest accrues on your student loan daily, what you can do is prevent any interest that might build up from capitalizing and increasing the cost of the debt to you.

Start by contacting your student loan servicer or lender to find out:

  • What stage of the student loan life cycle your loan is in.
  • Whether there is an outstanding accrued interest balance on your student loan.
  • If there is currently any outstanding interest, and when it is scheduled to be capitalized.
  • What options are available to pay off any outstanding accrued interest balances before it capitalizes.
  • Whether you are currently accumulating accrued interest on your student loan and how you can start making payments towards interest, even if payments are not required.

I hope you found this breakdown useful!

If so, share this post and let me know your thoughts in the comments.

~ Melisa Boutin

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