How Does APR Affect Your Student Loan?


When you take out a student loan, there’s much to keep track of. One of the most important things is your interest rate, but it’s not the only factor to consider. Another important thing is your annual percentage rate (APR) and how that affects your loan payments—this can be especially important if you plan to refinance or make extra payments on your loans.

What is APR?

APR stands for annual percentage rate. It’s the interest rate a loan charges, plus other fees. The APR is used to calculate the total cost of borrowing money instead of just looking at the interest rate alone.

In general, higher APRs mean higher costs and vice versa—companies charge high APRs because they know that people will be more likely to pay back their loans if they have an expensive one.

How Does APR Affect Your Student Loan?

APR, or annual percentage rate, is a key factor to consider before signing up for student loans. However, your interest rate may seem like the most critical factor when assessing the terms of your loan, but APR takes into account other factors, such as fees and penalties, that can affect how much money you’ll pay back each month.

The average APR for student loans is 7% (as of 2018 for federal student loans). However, if you’re dealing with private lenders the government does not insure, your rates could be significantly higher—sometimes exceeding 15%. Student debt is one of the most common types of consumer debt in America because it’s so easily attainable. Federal law makes it so easy to obtain a student loan that many people don’t stop to think about what they’re getting themselves into until they’re already knee-deep in debt—which isn’t ideal.

What is the difference between APR and interest rate?

APR stands for Annual Percentage Rate and is the total cost of your loan over time. It includes all fees and other costs associated with the loan, such as origination fees, late fees, or prepayment penalties.

According to Lantern by SoFi experts, “The government sets the interest on student federal loans. If you are in school now, the government has set the federal student loan interest rate for undergraduates at 3.73% for the 2021-22 school year.”

Interest rate is a common term used to describe your monthly payment on student loans.

How to lower your APR?

  • Pay on time. If you miss a payment, your interest rate will increase, and so will the amount of money you pay in interest over time.
  • Pay more than the minimum. The quicker you pay off your loan, the less interest you’ll pay over time because that money will take less time to accrue additional interest.
  • Refinance or consolidate loans if possible so that they’re at a lower rate (but don’t do this just for convenience—make sure refinancing makes sense for your situation).

Hopefully, this article helped you better understand the APR concept and how it affects your student loans. Contact financial experts for more guidance and advice on student loans.