How Much Does a Student Loan Really Cost?

Key Takeaways:

  • Origination fees are fees charged for borrowing the loan, even if you pay back the loan the same day. They are generally only charged on federal student loans.
  • The government pays your interest while you are at least a half-time student and other times of deferment if you have a subsidized loan.
  • Interest is charged from the day you borrow loans until you pay them back.
  • There generally isn’t a charge for paying off your loan early. Thus, feel free to send in extra money when you can.
  • Don’t pay off your loan early if you qualify for any kind of loan forgiveness program, as you could reduce the amount forgiven.

In order to compare student loan borrowing options, you need to know all 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 private loans don’t.

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

Origination Fees

An origination fee is a fee added to a loan the day it is first borrowed. Private student loans generally don’t have origination fees. 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. 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 will 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

As opposed to origination fees, interest rates are charged as you go on both federal student loans and private student loans. For instance, let’s say the annual interest rate on a loan is 4 percent. If you paid back the money in 10 days, you’d only pay .011% (10 days divided by 365 days) of the amount of the loan to do so.

You will generally pay less in interest if you borrow the loan for a shorter period of time, such as 10 years instead of 30 years. However, you can always pay off a loan early if you pick a longer term. Common strategies for paying off a loan early include sending in extra money when you have a bonus, sending in an extra $5 to $10 per month, or making biweekly payments.  

The biweekly method works this way: instead of making payments monthly, you divide the monthly payment into two.  Then, you make the payment every two weeks when you get your paycheck. You’ll end up with two extra biweekly payments per year, which is equal to a one month payment. You can easily cut a year or more off of your payments in 10 years' time this way without stretching your budget.

Subsidized Interest

Subsidized federal student loans are generally the only loans for which you get a break from being charged 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 and is done by your college or university.

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. The government or lender will add the $480 to your loan balance for a total of $4,480. The $480 is now charged interest on the same way the rest of your loan would.

Variable Versus Fixed Interest Rates

Most student loans have fixed interest rates, where the interest rate never changes. 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 significantly, and you can’t plan well for future payments.

How Interest Adds Up

Wondering how much interest you’ll pay over the life of your loan? We used the Federal Student Loan Repayment Estimator and our own calculator for private student loans to calculate interest charged for a recent graduate who borrowed $33,000 in student loan debt over four years.

Loan type Amount borrowed Interest rate Term Interest accrued during school Monthly payments Total payments
Subsidized $20,000 4% 10 years $0 $202 $24,299
Unsub. $10,000 4% 10 years $1,166 $113 $13,566
Private $3,000 5% 10 years $432 $36 $3,396
True cost $33,000       $351 $42,233


Public Service Loan Forgiveness

While paying off a loan as soon as possible is generally a good idea, it may not be if you qualify for some sort of government program for partial loan forgiveness. After all, if you pay off your loan early, you are losing out on some of the money forgiven. For instance, the Public Service Loan Forgiveness Program forgives your remaining student loan debt for public service workers after 10 years of on-time payments under specific repayment plans. 

At Edmit, we want to increase transparency around what you’ll pay to go to college, while maximizing student negotiating power to ensure you’re getting the best net price for your college education. After all, the more affordable your college degree is, the fewer student loan debt you’ll have—which means more flexibility in your career and life choices later.

If you have questions about your specific financial aid situation and how student loans can impact your college financing, compare financial aid offers with Edmit and/or speak with the financial aid counselors at the college you hope to attend.

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