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12.2. Interest Rates and Terms

Interest is the cost of borrowing—it’s what makes loans grow over time. Understanding it is key to managing debt.

• Federal Loan Rates: 

  • Fixed for the life of the loan—e.g., 6.53% for undergrad Direct Loans in 2025–2026 (rates reset annually).

  • Subsidized loans: No interest while in school; unsubsidized and PLUS accrue immediately.

  • Terms: Standard repayment is 10 years, but plans can extend to 30.

• Private Loan Rates: 

  • Fixed (e.g., 5%–12%) or variable (e.g., 3%–15%, tied to market rates like LIBOR or SOFR).

  • Vary by credit score—excellent credit gets lower rates; poor credit or a co-signer means higher.

  • Terms: 5–20 years, depending on the lender, with less flexibility than federal loans.

• How Interest Works: 

  • Simple example: Borrow $10,000 at 5% fixed interest, repaid over 10 years. You’ll pay about $2,728 in interest, totaling $12,728. With variable rates, that could rise if rates climb.

  • Accrual: Unpaid interest adds to your principal (capitalization), making future interest costlier.

Tip: Pay interest during school if possible (especially on unsubsidized or private loans)—it keeps your balance from ballooning.