Interest Rates and Fees For Student Loans
Saturday, August 18, 2018, 12:00 PM | Leave Comment
The cost of attendance for a year at a college or university ranges from $13,000 to $40,000, but when you fund your education with student loans, the total cost may be tripled by the time you finish paying it off.
Many students would be daunted if they realized how much they are actually paying for their educations. The extra cost is the interest you pay over the life of your loan. Interest is the price you pay for the use of someone else’s money.
Instead of putting money into a business that might do well some years and slump or even fail in others, someone is investing in you, with confidence that when you graduate, you will earn a good salary and repay not only the amount you borrowed, but a respectable amount of interest for the privilege of using the money.
Loan Advisor Reliable Moneylenders states that to an investor, your student loan is a commodity guaranteed to provide a steady, predictable income for many years, along with the eventual return of the principal. Since there is always a risk that you will not be able to repay the loan, the loan must be insured, or the interest rate must be high enough to compensate the lender for taking a gamble. Calculating the exact amount of interest you will pay on your loan is complicated.
Each time you make a loan payment, you are paying interest and also paying off a small portion of the loan principal, so that every month, the interest is calculated as a percentage of a slightly smaller amount.
If you do not pay interest during periods of deferment or forbearance, it is added to the principal of the loan (capitalized), making the principal larger. It is difficult to know exactly how much you are going to pay for your loan. You can find a number of online calculators that can tell you what you will pay using different repayment plans and paying off your loan over ten, twenty, or thirty years.
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Savvy Student Tip:
If your income is limited and you can barely afford your monthly payment, calculating the amount of interest you are going to pay over the next 20 or 30 years is not going to mean much because you have no choice but to pay it.
If you have extra money to put into loan payments, knowing how much interest you will pay can help you decide whether to change to a different repayment plan, make extra payments to lower the loan balance, or put some of that extra cash into savings for a mortgage or retirement.
The percentage rate charged for most student loans does not alarm ordinary student. The cost of attendance for a year at a college or university ranges from $13,000 to $40,000, but when you fund your education with student loans, the total cost may be tripled by the time you finish paying it off.
Many students would be daunted if they realized how much they are actually paying for their educations. The extra cost is the interest you pay over the life of your loan. Interest is the price you pay for the use of someone else’s money.
Instead of putting money into a business that might do well some years and slump or even fail in others, someone is investing in you, with confidence that when you graduate, you will earn a good salary and repay not only the amount you borrowed, but a respectable amount of interest for the privilege of using the money.
To an investor, your student loan is a commodity guaranteed to provide a steady, predictable income for many years, along with the eventual return of the principal. Since there is always a risk that you will not be able to repay the loan, the loan must be insured, or the interest rate must be high enough to compensate the lender for taking a gamble. Calculating the exact amount of interest you will pay on your loan is complicated.
Each time you make a loan payment, you are paying interest and also paying off a small portion of the loan principal, so that every month, the interest is calculated as a percentage of a slightly smaller amount. If you do not pay interest during periods of deferment or forbearance, it is added to the principal of the loan (capitalized), making the principal larger.
It is difficult to know exactly how much you are going to pay for your loan. You can find a number of online calculators that can tell you what you will pay using different repayment plans and paying off your loan over ten, twenty, or thirty years.
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Forbearance, Deferment, and Interest Rates
Capitalization — or the addition of interest to the balance of a loan — after periods of deferment or forbearance, contributes significantly to the amount you ultimately have to pay off. Interest is now calculated based on the new, larger loan balance, and your monthly loan payment becomes larger. Interest that accrues during in-school, grace and deferment periods, and during periods of active military duty is not capitalized until the end of the deferment.
If you can make interest payments while you are still in deferment, or a payment just before the end of your grace period or deferment, you can prevent that interest from being capitalized.
Interest during periods of forbearance can be capitalized quarterly (every three months) under the Higher Education Act. While you are in forbearance, try to continue making interest payments.
