How is federal student loan interest calculated

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College is supposed to be fun, right? Hollywood sure thinks so: in movies like Old School, Legally Blonde and Accepted, it’s one-half wild parties, one-half intellectual and emotional discovery. But that’s Hollywood—the schools themselves paint a different, but equally attractive picture. Open any admissions office pamphlet and you’ll find students lounging cheerfully in grassy campus spaces; friendly, approachable professors chatting with small clusters of adoring undergrads; clean, peaceful dormitories; and constantly perfect weather.

While both of these portrayals contain some truth (there are parties; the weather is nice sometimes), there’s one aspect of college that is often left out, or at least pushed to the sidelines: the price tag. While it’s no secret that getting a degree has grown more expensive in recent years, the numbers are nonetheless surprising. The cost of tuition and fees at public four year institutions increased by 17% over the past five years alone, according to data from The College Board.

For many students, the only way to stay atop this rising tide has been by taking on an increasing amount of student loans. The result has been skyrocketing student loan debt over the past decade.

Not so fun, that – but don’t get discouraged. Sure, some recent graduates have student loan horror-stories to tell: high debt, low job prospects and a load of other expenses to boot; and others have simply stopped bothering to make loan payments at all (the total number of people with defaulted student loans recently climbed to over 7 million). Many graduates, however, find their debt to be manageable, and, in the long run, worthwhile.

The important thing is to know in advance what you’re getting yourself into. By looking at a student loan calculator, you can compare the costs of going to different schools. Variables like your marital status, age and how long you will be attending (likely four years if you are entering as a freshman, two years if you are transferring as a junior, etc.) go into the equation. Then with some financial information like how much you (or your family) will be able to contribute each year and what scholarships or gifts you’ve already secured, the student loan payment calculator can tell you what amount of debt you can expect to take on and what your costs will be after you graduate – both on a monthly basis and over the lifetime of your loans. Of course how much you will pay will also depend on what kind of loans you choose to take out.

Here to help

The federal government has a number of different student loan programs, described below, that offer low interest rates and other student-friendly terms. If you are able to use any of these programs to pay for part of your college tuition, your debt after graduation may be easier to manage.

Different loans for different folks

Before getting into the different types of available loan programs, let’s do a quick refresher on how exactly student loans work. Like any type of loan (auto loan, credit card, mortgage), student loans cost some small amount to take out (an origination fee) and they require interest and principal payments thereafter. Principal payments go toward paying back what you’ve borrowed, and interest payments consist of some agreed upon percentage of the amount you still owe. Typically, if you miss payments, the interest you would have had to pay is added to your total debt.

In the U.S.A., the federal government helps students pay for college by offering a number of loan programs with more favorable terms than most private loan options. Federal student loans are unique in that, while you are a student, your payments are deferred—that is, put off until later. Some types of Federal loans are “subsidized” and do not accumulate interest payments during this deferment period.

Stafford loans

Stafford loans are the federal government’s primary student loan option for undergraduates. They offer a low origination fee (about 1% of the loan), the lowest interest rates possible (4.29% for the 2015-2016 academic year), and unlike auto loans or other forms of debt, the interest rate does not depend on the borrower’s credit score or income. Every student who receives a Stafford loan pays the same rate.

There are two different types of Stafford loans: subsidized and unsubsidized. Subsidized Stafford loans are available only to students with financial need. As long as you are in school, and for a six month “grace period” following graduation, you do not have to pay interest on subsidized loans, as the federal government takes care of that for you. All told, subsidized Stafford loans are the best student loan deal available, but eligible undergraduate students can only take out a total of $23,000 in subsidized loans, and no more than $3,500 their freshman year, $4,500 their sophomore year and $5,500 junior year and beyond.

For students who are ineligible to receive subsidized loans, unsubsidized Stafford loans are available. These offer the same low interest rate as subsidized loans, but without the government-funded interest payments. That means that interest accumulates while you are in school, and is then added the amount you have to pay back (also known as your principal balance) once you graduate. While this may sound like a minor difference, it can add up to hundreds or thousands of dollars of debt beyond what you borrowed. A good student loan repayment calculator takes into account the difference between subsidized and unsubsidized loans.

Along with the specific ceiling of $23,000 for subsidized Stafford loans, there is a limit on the cumulative total of unsubsidized and subsidized combined that any one student can take out. Undergraduate students who are dependent on their parents for financial support can take out a maximum of $31,000 in Stafford loans and students who are financially independent can take out up to $57,500 in Stafford loans. So, for a student who has already maxed out her amount of subsidized loans, she could take out an additional $8,000 to $34,500 in unsubsidized loans, depending on whether or not she is a dependent.

Graduate and professional students can no longer get subsidized loans. Since 2012, they are only eligible for unsubsidized options. They can take out $20,500 each year for a total of $138,500. It’s important to note that this total includes loans that were taken out for undergraduate study as well.

PLUS loans

For graduate and professional students, the federal government offers a separate option, called PLUS Loans. There is no borrowing limit for PLUS loans—they can be used to pay the full cost of attendance, minus any other financial aid received, however they have a higher interest rate and origination fee than Stafford Loans (as of 2015, the interest rate for PLUS loans is 6.84% and the origination fee is about 4.3%). They also require a credit check, so students with bad credit may not be eligible. PLUS loans can also be used by parents of undergraduate students to help pay for a son or daughter’s education.

Perkins Loans

Perkins Loans are another form of low-interest (5% in 2015) federal loan, but unlike Stafford and PLUS loans, they are offered directly through your college or university. They are available only to students with financial need, and only at schools that participate in the program—to find out if this is you, check with your school’s financial aid office.

At schools that do participate, eligible undergraduates can borrow up to $5,500 per year and $27,500 total in Perkins loans; and eligible graduate students can borrow up to $8,000 per year and $60,000 total. But keep in mind that funds for Perkins loans are limited, so in practice those ceilings may be lower at certain schools.

Private loans

Once all federal loan options have been exhausted, students can turn to private loans for any remaining funding. Private loans generally offer far less favorable terms than federal loans, and can be harder to obtain. They can have variable interest rates, often higher than 10%. The interest rate, and your ability to receive private student loans, can depend on your credit record. While some do provide for the deferment of payments while you are in school, many do not. Private loans do not make sense for everybody, but for some students they can be helpful to bridge the gap between federal loans and the cost of college.

Applying for federal financial aid

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The process for obtaining federal financial aid is relatively easy. You fill out a single form, the Free Application for Federal Student Aid (FAFSA) and send it to your school’s financial aid office. Then they do the rest. The FAFSA is your single gateway to Stafford loans, Perkins loans and PLUS loans. Many colleges also use it to determine your eligibility for scholarships and other options offered by your state or school, so you could qualify for even more financial aid.

There is really no reason not to complete a FAFSA. Many students believe they won’t qualify for financial aid because their parents make too much money, but in reality the formula to determine eligibility considers many factors besides income. By the same token, grades and age are not considered in determining eligibility for most types of federal financial aid, so you won’t be disqualified on account of a low GPA.

At what cost?

If you think you’ll be using one or more of these loan programs to pay for college, it’s a good idea to determine ahead of time approximately what your payments will be after you graduate. A student loan calculator can help. The size of your monthly payments will vary depending on what types of financial aid you are eligible for and what school you attend. Although cost should not be the primary factor any student considers when deciding where to go to school, it could be one of several considerations, especially if you will need to use student loans to pay your tuition. You don’t want to miss out on enjoying your college experience because you’re worried about debt. College is supposed to be fun, isn’t it?

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