Disclaimer: Student Loan Tutor is an independent business. We are not affiliated with and do not work for the US Internal Revenue Service (IRS) or the Department of Education. We are not a collection agency. All services are provided at the direction of our clients.

The Phenomenon of the Negative Interest Rate
of Student Loans

By Zack Geist, Founder of Student Loan Tutor
June 1, 2023

When discussing debt, the interest rate is typically the most important number to consider, because it determines how much the debt will cost you over time. But it turns out that federal student loans don’t work this way at all. Let's break it down.

Stated Interest Rate vs. Effective Interest Rate

Most people know their stated interest rate — the number the bank or loan servicer offers when you get your loan. For instance, you might know your student loan has a stated interest rate of 6.8%. If you plan on paying off your loan in 10, 15, or 20 years, then indeed, your stated interest rate is 6.8%.

But here comes the twist - When you enroll in an income-driven repayment program through the Department of Education, you will receive loan forgiveness after 20-25 years (or less, depending on your situation). And many people can qualify for a low or $0 monthly payment, even working professionals with significant incomes.

With eventual forgiveness and a low monthly payment, what your loan ends up costing you in total will likely be much less than if you treated it as a traditional loan. And what you thought your interest rate was isn't really your interest rate. This is what we call your ‘effective interest rate’.

The Phenomenon of the Negative Interest Rate

For most of our clients, their effective interest rate is considerably lower than the stated interest rate. In some cases, it might even be 0%, sometimes negative 50%, and in extreme cases, even negative 100% interest.

I know what you're thinking, what the heck is a ‘negative interest rate’? Picture this - let's say you borrow $100, and for some reason, you agree to pay back just $90 in ten years. What's your effective interest rate? It's negative 10%. With factors such as inflation and high-yield accounts, this rate could get even lower.

The Big Picture

The concept of a ‘negative interest rate’ might sound shocking, especially since conventional financial wisdom suggests all debt should always be paid back in full. But the current landscape has changed, education and housing prices have far outpaced increases in income, making it harder to pay back student debt.

In this scenario, we need to consider our moral obligations alongside our legal obligations. Yes, the system seems skewed towards a lack of 100% payback, but it's the same system that lets you take tax deductions. If you can legally reduce the amount of money you pay towards debt and instead, invest it elsewhere, isn't that the financially sound decision to make?

At the end of the day, your effective interest rate is a tool you’d be wise to use to navigate your financial journey. It can significantly impact your financial reality and open up new opportunities for investment and growth.

Just like your tax expert would tell you about all the deductions you've been missing out on, Student Loan Tutor is here to tell you about this hidden gem in the world of student loans. And yes, it's going to blow your mind for a minute. But once you wrap your head around it, you'll see how you could potentially save hundreds of thousands of dollars over the life of your loan.

So go ahead, ask your friends, what is their effective interest rate on their student loans? Chances are, they won't know. And if they don't, it's time to have a conversation about effective interest rates, because as the saying goes, knowledge is power. And in this case, it could be the power to save a lot of money.

If you’d like to find out if you’re a good candidate for our services, schedule a free evaluation with one of our professionals. We’d love to help you if we can.

About the Author

Zack Geist

Zack Geist founded Student Loan Tutor in 2015. As one of the leading experts in federal student loan repayment he and his team have taught thousands of student loan borrowers all over the country how to save enormous amounts of money and hassle. He currently resides on the Hamakua Coast of Big Island Hawaii.

More Resources

student image 1

How To Pay Off $100k Plus in Student Debt

March 26, 2021

Learn more about how to pay off over $100,000 in student debt.

student 2

What is Student Loan Forgiveness and Student Loan Repayments?

April 2, 2021

What is student loan forgiveness? In this article, we cover student loan forgiveness, student loan repayments, and how you can save more.

students at a table

Mastering Your Federal Student Loans

April 14, 2021

Learn more about how you can master your federal student loans. Read our blog article today to get the latest insights.


The (Nearly) 5 Star Student Loan Advisor

Student Loan Tutor is ranked 4.9 stars on Trustpilot, the Better Business Bureau and Facebook.

4.8 star rating
BBB logo

5/5 stars. Established 2015.

Why Clients Love Us


Saved me over $150,000 on my loans. They take the time to answer ALL your questions, and do almost every single part of the process FOR YOU, so you don’t have to stress out about making a small mistake that could cost you tons of money. I feel like they lifted a small elephant off my back. Thank you!"

-Lauren Buckley

You Are Paying Too Much

Your student loans don't need to be such a burden. We're here to help show you a better way.