What is an Interest Rate?

An interest rate is best understood as the cost of borrowing a certain amount of money. When you take out a student loan or any loan, it will come with this cost. People normally look to get loans that have the lowest interest rates (keeping in mind any associated fees that add to the total cost).

Some loans don’t begin charging interest until a certain time after you graduate, some start charging interest immediately. Interest is expressed as a percentage of the total loan amount. If you took out a $5,000 loan, and your interest was 10% fixed a year, that would mean that every year, $500 would be added to your original loan of $5,000 (assuming you only paid off the interest each year).

While seemingly insignificant, the difference between a 10% and 5% fixed interest rate in the example above could mean more than $250 in savings each year.

The Basics of Paying for School

Your COA (Cost of Attendance) is estimated by universities using these factors:

Tuition + Mandatory fees for course materials, Room & Board, Health Insurance, Personal Expenses

Schools include multiple estimates for singles, couples, and families. If you aren’t living on campus, already have health insurance, or have scholarships, you may not pay the full COA, as you won’t incur the full cost of the items listed. Keep this in mind when researching schools, and when making other decisions, like if you should move on-campus, get an apartment, or stay at home.

It’s likely you’re going to be applying for financial aid in order to save money on the tuition portion of the COA. There are many different kinds of financial aid, and categories vary between universities. You will typically hear about merit-based aid as soon as you’re admitted. Most schools will have you apply for need-based financial aid after you’ve been admitted and accepted their offer. It’s within merit-based aid that most people are awarded things like scholarships or gift-aid by the school. Need-based aid will be based on separate applications, like FAFSA, or the university’s own need-based financial aid form. It typically takes 3-4 weeks to hear back about need-based aid.

Once you hear back from your university’s aid office, you’ll be presented with an award letter. Think of your financial aid award letter as a first draft as opposed to a finished product. If you really want to go somewhere and the cost after scholarships and aid is too high, try asking for more. Schools won’t rescind your acceptance just because you ask politely for more financial help, so try! Check out our template for negotiating more financial aid here.

Now that that’s out of the way, we can talk about the next step, which is taking out loans to cover what scholarships, merit-aid, and need-based aid won’t cover.

Undergraduates have options when it comes to borrowing student loans. You can take out a federal student loan or a private student loan, you can also choose between taking out a loan in your name or if you have the option, having your parents take a loan for you, through a Parent Plus Loan, or a private student loan with your guardian as a co-signer.

When deciding between federal versus private student loans, there are a few things to consider. Federal Stafford loans will likely have the lowest interest rates but it’s common that students need to borrow more than that federal limit. The federal borrowing limit for dependent undergraduates is usually around $5,500 for the first year.

However, undergraduates who display exceptional financial needs may be eligible for a Pell Grant from the federal government. You should apply to FAFSA, which determines your eligibility for things like additional grants and work-study. Both public and private colleges use FAFSA to gauge your financial situation; applying is a great way to make sure you get access to the aid you are eligible for and don’t end up over-borrowing.

After you’ve applied to FAFSA, figured out your Pell-Grant eligibility, and borrowed to the federal cap, that’s where private loans come in. Private loans are best used for the remainder of financial need and can be used in lieu of a Parent PLUS loan (9.08% with a 4.228% origination fee) which can be more expensive than a private loan. Popular places to borrow private loans include Sallie Mae, College Ave, and Discover (Juno helps you get discounts from lenders like these).

If you’re a DACA student, financing an education may be tricky, but not impossible. Check out our DACA-specific guide here.

After you’ve borrowed and your loan has been dispersed, we highly recommend remaining organized from the get-go. That means organizing your loans even before you graduate, and knowing when your payback period starts, what kind of loans you’ve taken out, and where they’re held. That way, you won’t be blindsided by payments after your grace period.

Refinancing: The Low Down

What do you do after graduating? Well, you start having to pay back your loans. However, there is a way to save money through this process too, and that's refinancing. Refinancing basically means to finance (something) again, typically by taking out a new loan at a lower interest rate. The new, cheaper loan, pays off the old loan, and you save on the overall loan cost while likely lowering your monthly payment.

When you first take out a loan, the interest rate is set by a variety of factors including your ‘riskiness’ – the likelihood you’ll pay it back. Once you have a steady income, your ‘risk’ is reduced and lenders are more willing to give you a better deal. Refinancing usually works best for graduates who have Unsubsidized Direct Loans, Graduate PLUS loans, and/or private loans. Refinancing federal loans may forfeit certain perks such as public service forgiveness and economic hardship programs.

It’s important to keep in mind what your career plans are and how those may affect your federal loans. If you are going into public service, you may want to keep your federal loans so that you may qualify for Public Service Loan Forgiveness.