Federal student loan interest rates are set by the government and in most cases, do NOT take into consideration your individual situation. Every borrower receives the same deal. It makes no difference whether you are a millionaire or flat out broke. Some needs or profession based federal loans are the exception as they consider only a small set of facts for qualification and typically offer a rate break over normal federal loans.

If the government is not subsidizing the program (aka picking up some of the tab), the available interest rate should be higher than the best market rates available, but lower than the worst.

Private Student Loan Interest Rates

The interest rates are set by the lender based on your specific situation and the products they have available. If you have fantastic credit, no debt and high income, you should receive the lender’s best interest rate option.

The interest rates on private loans are all over the place. We have seen loans with interest rates from as low as 2% all the way up to more than 20%!

Variable vs. Fixed Rates

Federal and private medical school loans can be fixed or variable. Federal loans that were originated before 2006 were variable rate only. From 2006 until now, the rates on new federal student loans are fixed.

Fixed Rates

Fixed rates are pretty simple. The interest rates are fixed for the life of the loan and are independent of the repayment method and economic conditions. At origination, the fixed rate is normally higher than the comparative variable rate loan. However, if (or when) market rates increase, it does not affect the fixed rate loan’s interest rate.

Variable Rates

Variable rates are a little more complex. The interest rate can go up and down and is typically tied to some sort of market rate (like the prime rate). Economic conditions go up and down, which will cause your rate to go up and down with it. Many loans have a cap on interest rates which tell you the maximum rate you would ever pay.

Subsidized vs Unsubsidized

The government picks up the interest tab on any subsidized loans while you are in school or deferment and sometimes during grace but never during forbearance.

Under Income Based Repayment IBR, Pay As You Earn PAYE, and Revised Pay As You Earn RePAYE, if you have a subsidized loan, the government forgives 100% of unpaid monthly interest for the first three years of repayment. Therefore, your outstanding balance will not increase during this time. Also under RePAYE, if you don’t qualify for the 100% subsidy mentioned above, and your monthly payment isn’t large enough to cover the monthly interest, the government will forgive 50% of the unpaid interest.

Interest Capitalization

Most loans require that your monthly payment, at minimum, cover any interest accrued. This is not true with student loans. In many cases, your payment will only be a fraction of the interest. You need to know what happens to this unpaid interest in varying circumstances! Either it does not capitalize and builds up in a side account that doesn’t accrue interest, or it capitalizes and gets added to the principal balance. When capitalization occurs, you begin paying interest on your interest. As a result, large unpaid interest balances begin to build up.

Capitalization Example

In your first year of medical school you borrow $100 at a 10% interest rate. The interest does not capitalize while you are in school. After one year, you have made no payments. Therefore your principal balance is still $100 and your interest for the year is $10. In this example, because payday loans in Eastlake interest does not capitalize, interest does not get added back to your principal balance and instead is considered uncapitalized interest (which doesn’t actually accrue interest). After 4 years you enter repayment and your outstanding balance is still $100. Plus you have $40 of interest (4 yrs x $10 interest). At this point you’re paying 10% on the $100 and 0% on the $40 interest, therefore your effective interest rate has actually dropped to around 7.14% ($10 interest divided by $140 interest and principal balance).