APR vs interest rates for federal student loans

By Scarlett Li | Published on October 21, 2025

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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. 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 APR includes any origination fee or other costs that may be added when signing your loan agreement in addition to the interest rate. 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.

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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.

APR vs interest rates: which one should you look at?

You should look at the APR (Annual Percentage Rate) because it includes both the interest rate and any additional fees or costs associated with the loan, giving you a clearer picture of the true cost of borrowing. The interest rate only reflects the cost of borrowing the principal amount, whereas APR represents the total annual cost, making it a more accurate measure for comparing loans.

Also, federal student loan interest rates vary depending on the type of loan and when it was disbursed. These rates are subject to change each year on July 1st.

Are private student loan interest rates higher than federal student loan interest rates?

Generally, private student loan¹ interest rates can be higher than federal student loan rates, but this depends on several factors, including your credit score, the loan's terms, the type of loan, and market conditions.

While federal student loans offer fixed rates, private loan rates can be fixed or variable, and borrowers with excellent credit may secure rates that are comparable to or lower than federal rates.

However, most private loans do not come with the same borrower protections and benefits as federal loans, such as income-driven repayment plans or loan forgiveness options.

* As a result of ongoing court actions, the terms of some Income-Driven Repayment (IDR) plans, including the SAVE plan, may be subject to change. Please refer to studentaid.gov for the current status of these plans.

Fees for federal student loans

So what does this mean for federal loan borrowers? Federal student loans have fees set by Congress that are a percentage of the total loan amount. Each year, the rates are determined based on the yield of the 10-year U.S. Treasury note, with an added fixed margin. Congress established this method in 2013 as part of the Bipartisan Student Loan Certainty Act.

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**.

*Example listed above is for illustrative purposes only*

Read more: APR versus interest rates for private student loans

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:

=PMT(rate,nper,pv)

Where:

• 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:

=RATE(nper,pmt,pv)

Where:

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

Understanding APR and exploring your loan options

Understanding the APR of your student loan is crucial for making informed financial decisions. While federal loans provide fixed rates and set fees, exploring private student loan options can also offer competitive rates and terms.

Earnest provides private student loans with flexible terms, no fees, and a variety of repayment options to fit your needs. With transparent APRs and customizable plans, Earnest can help you manage your education expenses efficiently. Visit our private student loans page to discover how Earnest can support your financial goals and use our student loan calculator to estimate your potential payments. Explore your options with Earnest today to find a loan that best fits your needs.

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About the Author

Scarlett Li

Scarlett Li is the Associate General Manager of Private Student Loans at Earnest.

Disclaimer

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