How Much Does a Student Loan Really Cost?

To accurately compare student loan options, you need to know the costs associated with borrowing the money. For example, a federal student loan may offer more repayment options, but federal loans charge an extra fee that many private loans don’t.

Here are the most important terms that determine what a student loan costs:

Origination Fees

An origination fee is a one-time charge added to a loan when it is first borrowed. Private student loans often don’t have origination fees, but federal student loans generally do. 

Subsidized and unsubsidized federal student loans issued directly to students have origination fees that are around 1 percent of the loan amount. Federal PLUS loans issued to parents and graduate students have origination fees of around 4 percent of the loan amount. On a $4,000 loan, you’d owe an extra $40 with a 1 percent origination fee or $120 with a 4 percent origination fee.

Because of origination fees on federal student loans, you may want to use the Repayment Estimator Calculator to calculate the cost of federal student loans. This calculator will factor in the extra cost to borrow the money.

Interest Rates

Interest rates are essentially what the lender charges you to borrow the money, and they come with both federal and private student loans. Interest usually starts accruing as soon as you receive the money, even if you don’t have to start repayment until after you graduate. That means your loans can grow to more than what you originally borrowed.

For instance, say the annual interest rate on a $5,000 loan is 4 percent. If you paid back the money in just one year, you’d pay about $200 in interest.

Interest is typically the most expensive part of borrowing money, but you will generally pay less in interest if you borrow the loan for a shorter period. Thus, repaying debt in 10 years should be cheaper than repaying it over 20 years. 

There are different types of interest that can be applied to your student loan, including:

Subsidized Interest

Subsidized federal student loans are generally the only loans for which you get a break from interest. If you are approved for this type of educational loan, you don’t have to pay interest when you are in school with at least a half-time status or during other allowed payment breaks such as military service. Approval for subsidized federal loans is based on your financial need.

Capitalized Interest

Capitalized interest is a term used when you are charged interest on interest. This generally happens when you enter repayment or after a period of deferment. 

For instance, let’s say your loan was for $4,000 and you accumulated $480 in interest while in college before your first payment. Your loan servicer will add the $480 to your loan balance for a total of $4,480, and that $480 now accrues interest in the same way the rest of your loan does.

Variable vs. Fixed Interest Rates

Most student loans have fixed interest rates, where the interest rate never changes (all federal loans come with this type of interest). But private lenders also offer variable interest rates, where your interest can change periodically based on certain economic indicators. 

The variable rates you’re offered when you first apply are often lower than fixed rates, but they come with an added risk — your interest rate could increase significantly over a 10-year period, which is how long many borrowers take to repay their loans. 

If you choose a variable-rate private student loan, make sure it’s because you can pay back the loan within three to five years. Otherwise, the interest rate could rise dramatically and your debt would be a lot more expensive than you planned. 

How Interest Adds Up

Wondering how much interest you’ll pay over the life of your loan? Here’s a simplified look at how your interest can add up while you’re in school and even after you start repayment.

Say you borrowed $30,000 during your freshman year with a 4 percent interest rate. During your four years of school (plus your six-month grace period after graduation), your loans will have accrued roughly $5,400. That means that once you start repayment, your loan has grown to $35,400. 

Now, you plan to pay off your loan in 10 years. Your monthly bill will be about $360, but since you’re still accruing interest during this time, the total amount you’ll pay in 10 years is about $42,925. 

So how much did that $30,000 loan cost you in interest? A whopping $12,925! 

This is why the interest rate on your loan is so important. Though a 4 percent rate sounds like a small number, that cost can majorly add up over a decade or more of repayment.

Other Student Loan Costs to Consider

Though interest and origination fees are likely the largest costs you’ll face when it comes to education debt, other charges may be levied over the life of your loan. Added fees are common, such as application fees, late fees, or returned payment fees. Though these are often small, they can add up — not to mention the fact that missing payments will keep you in debt (and accruing interest) longer.

The same goes for deferring your debt, which is when you can temporarily pause payments for certain reasons. While it can be nice to get a break on your debt for a while, factor in the added costs of nonpayment during these times. Not paying your debt for six months could add hundreds in interest costs, depending on your loan.