Many people have heard stories of student loan borrowers who have faithfully made regular payments for decades but have barely made a dent in their balance or owe more money today than when they graduated from college.
This doesn’t happen when borrowers make payments based on standard repayment plans.
That means that the required monthly payment could be less than the amount of interest that the lender charges on the loan.
In that case, the balance of the loan grows over time, and the amount of interest charged grows, too.
Right now, federal direct unsubsidized loans for undergraduates carry a 5.05% annual interest rate.Even though interest rates on student loans are expressed as an annualized interest rate (such as 5.05% per year), interest on federal student loans is determined by a daily interest rate.A 5.05% annual interest rate translates to a 0.0138% daily interest rate.That means, no matter how high the index rate goes, the lender will not charge more than the maximum rate.The primary advantage of fixed-rate loans are that borrowers will know exactly how much they owe each month, which makes it easy to budget for.