Home > Student Loans > What’s the Difference Between Your Student Loan’s Interest Rate & APR?

Comments 1 Comment

When it comes to student loans, most people are curiously uncurious about the interest rate they’re being offered. It makes sense to some extent — after all, federal loans, which make up the majority of outstanding education debt, only offer one interest rate for each type of loan (e.g., 7.21% for Direct PLUS loans, regardless of the borrower’s creditworthiness). People usually take the rate they’re given and don’t think twice about it.

But as the interest rate environment changes and new student loan options (like refinancing) become available, it’s increasingly important for borrowers to get acquainted with their interest rate(s). For example, one of the best questions I hear from our members here at SoFi (a lender that offers student loan refinancing) is what is the difference between straight interest rate and annual percentage rate (APR) – and why should they care?

Since interest rate is directly associated with how much money you’ll spend paying back your debt, it’s important to understand how these terms differ as well as how they relate to student loans specifically. Here’s a quick primer.

The Basics

Interest rate is basically the amount your lender is charging you to borrow money. It’s expressed as a percentage of your principal (or original loan amount) and doesn’t reflect any fees or other charges that may be connected to your loan.

APR, or the annual percentage rate, represents a more complete view of what you’re being charged. Since fees are factored in, it’s almost always higher than the interest rate. Government regulators require lenders to disclose APR to prospective borrowers, which theoretically makes it easier for you to determine the true cost of one loan versus another.

The Fees

For student loans, the most common fee is the origination fee, which is basically an upfront charge that lenders – private and federal – may charge for originating, or making, the loan. It can vary widely from one lender to the next, and some loans may not even have one at all.

The Caveat

While the idea behind APR is that it should provide a more apples-to-apples comparison of loan costs, lenders can handle origination fees in different ways, which can in turn affect what’s included in APR. For example, federal student loans deduct the origination fee from your loan disbursement upfront, which keeps the fee out of the APR calculation. Private lenders typically add the origination fee to the loan amount and “finance” it, which means it is included in APR.

Borrowers should also be mindful of the time that the loan spends in forbearance — if interest is accrued during the time of non-payment, that interest is capitalized (i.e. added to the loan’s principal) when repayment begins or resumes. APR on a new loan won’t reflect this cost because it’s a variable that has yet to occur (and may not at all). Just know that if you do take advantage of forbearance options, it is likely to affect your APR.

The Bottom Line

As with any type of debt, it’s important to understand the costs associated with your student loans. If you’re concerned about how much interest you’ll be paying (as is often case in refinancing situations), you should look at both the interest rate and APR, and ask the lender about any charges that may be unaccounted for in these figures.

Making your student loan payments more affordable can help you manage your debts better over time. Staying on top of your student loan payments can help you build or maintain good credit, too. You can see how your student loan payments are affecting your credit by getting your free credit report summary, updated every 14 days, on Credit.com.

More on Student Loans:

Image: iStock

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • StudentLoans101

    Just to clarify some of the statements above….. Historically, some private loans add the Origination Fee to the principal balance; others deduct it from the loan proceeds. In both cases, the lender must include the effect of the Origination Fee in the APR calculation. The only reason Federal Loans do not show an APR is because they are exempt from Truth-in-Lending (Reg Z). See section 226.3 (f) of the FDIC regulations for more detail. Also, when refinancing student loans, there should be no reason to use a lender that changes Origination Fees; avoid lenders that charge fees and go with the lowest interest rate lender.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team