3 Student Loan Components and What They Mean for You

August 17, 2018

Taking on student loans is a major responsibility. Because so many factors affect what you owe, it can be difficult to know whether you’re making a good decision. The key to being a wise borrower is to learn about the various parts of a student loan, some of which are outlined below, and to watch for some red flags indicating a bad deal.

Interest Rates

A loan’s interest rate is the amount charged on the total amount you owe. For example, if have a $5,000 loan and a 5 percent interest rate is charged, you’d owe $5,250. Exactly when interest is charged varies from issuer to issuer.

Note that while many student loans don’t require that you start making payments while you are still in school, they may still build interest. This means that by the time you graduate and have to start making payments, the loan amount may be far larger than the initial sum you took out. Be sure to check whether the loan offers fixed rate or variable rate financing. A fixed rate amount stays the same, but a variable rate can go up or down.

Loan Terms

The loan’s terms tell you how long the lender expects you to take to repay the amount. Loans with short terms tend to have higher monthly payments compared to longer term loans of the same amount. Also, with longer term loans, you may be offered more affordable monthly payments but end up paying much more in interest over the loan’s lifetime. When you’re comparing loan options, pay close attention to how adjusting the term period affects the interest rate.

Refinancing Options and Conditions

Some loans have refinancing options, meaning you can change the interest rate. However, you should understand how taking advantages of this service may affect your ability to repay loans. For example, some federal loans can be refinanced, but doing so may disqualify those loans from repayment or forgiveness programs. Though you want to take out loans that have a variety of repayment and refinancing offers, you need to check the fine print to ensure that any changes you make to your loans would actually help you.

Red Flags to Watch For

The above items are just a few components that make up a loan. To make a good decision, you’ll need to check this information as well:

  • Disbursement date: When you receive the funds and when they start building interest.
  • Interest accrual: Whether the issuer charges daily or monthly interest on your loan.
  • First payment date: When your first payment is due.
  • Payment schedule: The total number of payments you’ll make on the loan.

One of the best things you can do to avoid a bad deal is to compare private student loan offerings. This will let you see what the best private student loans have in common and what’s normal in terms of interest rates, loan terms, and repayment options.

If you keep researching and learning what each component of a loan means, you can make a good decision as a borrower. Compare all the options available to you, and carefully read through each loan’s terms and conditions before you sign a contract.