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APR vs Interest Rate

APR vs Interest Rates for Federal Student Loans 

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One major benefit of borrowing a student loan from the federal government is that everyone, no matter their credit score, will receive the same rate.  As of July 2006, all rates are also fixed for the life of the loan. 

These headline rates are adjusted every year for students, but the headline numbers don’t encompass the total cost of borrowing. To get that, you need to calculate the Annual Percentage Rate, or APR, of your loan. 

While many of us are familiar with what the interest rate of a loan is, the APR is even more important to know before signing any paperwork.

What is APR?

The interest rate is the cost of borrowing money. Each month the accrued interest will be added to the principal due in your monthly payment until you pay the principal back in full.

The APR includes any origination fee or other costs that may be added when signing your loan agreement in addition to the interest rate. For a mortgage lender, these are commonly called closing costs when taking on a home loan. With the Truth in Lending Act, lenders are required to disclose the APR before you sign a loan or take on a credit obligation. Typically fees mean your APR will be higher than the interest rate offer. 

Fees for Federal Student Loans

So what does this mean for federal loan borrowers? Federal student loans have set fees that are a percentage of the total loan amount. Similar to the fixed interest rate, these depend on the loan type and are set annually. The fee is deducted from each loan disbursement you receive while enrolled in school.

For example, a 4.236% fee means if you are borrowing for $10,000 in student loans, your school will receive $10,000 but you are “effectively” borrowing $10,423.6 in principal for that student loan to cover the fee. 


First Disbursement Date Loan Type Loan Fee
On or after 10/1/20 and before 10/1/21 Direct Subsidized Loans and Direct Unsubsidized Loans 1.059%
Direct PLUS Loans 4.236%

How to Calculate APR 

Now that we have the fees for each loan type, the next step to finding the APR is to estimate the monthly payment amount. Rather than breaking out the calculator or pen and paper, open excel or google sheets and type the following formula: 



  • rate is the interest rate divided by 12 (to get the monthly instead of annual rate)
  • nper is the number of payment periods, or months, you will make payments on the loan to repay it
  • pv is the present value, or principal, of the loan (including any fees charged upfront)

Now you can use that payment figure to calculate the APR in excel using the following: 



  • nper is the same number of payment periods you used before
  • pmt is sht monthly payment figure you calculated above
  • pv is the principal amount (this time without including any fees charged upfront)

APR for Federal Student Loans

Need an example of what APR vs interest rate can look like in the wild? We solved for each type of federal loan offered over a ten year repayment period. 

APR for Direct Loans First Disbursed on or After July 1, 2020, and Before July 1, 2021

Loan Type Borrower Type Fixed Interest Rate APR*
Direct Subsidized Loans & Direct Unsubsidized Loans Undergraduate 2.75% 2.97%
Direct Unsubsidized Loans Graduate or Professional 4.30% 4.53%
Direct PLUS Loans Parents and Graduate or Professional Students 5.30% 6.21%
*Calculated assuming a 10-year term

But what if you think you are going to refinance or repay it back in less than ten years? Your effective APR will be even higher given the fees are charged upfront. For example, if you were to pay off your GradPLUS loan in five years or less the effective GradPLUS APR will actually be 7.03% or higher given the 4+% fee upfront.

What a Difference Fees Can Make 

While the interest rate can give you a good idea of how much your monthly payments will be, they aren’t the whole picture. Calculating your APR based on your estimated repayment timeline is critical to knowing the cost of borrowing from a lender, whether it is a federal or private student loan. 

By Scarlett Li & Carolyn Pairitz Morris

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Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.