Calculating the Real Cost of Student Loans

Use the Free Application for Federal Student Aid (FAFSA) form to apply for financial aid for college. After filling out your FAFSA, you may receive a financial aid package that includes student loans. This is money that is lent to you to help pay for college expenses. But you will eventually have to pay back all the money you’ve borrowed — plus interest.

We just want to stress that last bit one more time: Student loans have to be repaid. With interest.

What exactly does that mean? Here are five student loan vocab words to learn today. Plus an illustration of how interest works.

Principal The total sum of money borrowed plus any interest that has been capitalized. (We’ll explain what capitalization is in a second.)

Interest This is a fee you pay to your lender — in addition to the amount of the original loan — as a cost of borrowing money.

Subsidized Loans If your student loan is subsidized, the lender pays the interest while you’re in school and usually for the first six months after you graduate.

Unsubsidized Loans Or if your loan is unsubsidized, you are responsible for paying the interest at all times.

Capitalization The addition of unpaid interest to the principal balance of a loan. This is perhaps the most important concept to understand when borrowing money, whether it’s student loans, credit card debt, a mortgage, you name it.

 

How Capitalization Works

The majority of federal student loans are subject to daily interest. This means the lender charges you interest every day.

Lets say you borrow $10,000 and the daily interest rate is 6.8%. Every day, you will be charged $1.86 in interest.

After you graduate from college, many lenders will defer your payments for six months to give you time to find a job and get settled in your new career. During those six months, you won’t have to make payments on your loan, but you’ll still be charged the $1.86 daily interest.

At the end of the six-month deferment, the daily interest charges will total $340. If the interest is capitalized, it will be added to your initial principal of $10,000. Now, you owe $10,340, and your daily interest charges increases to $1.93.

You don’t just owe more money, you’ll also have to pay more interest.

 

Are student loans … bad?

Student loans can be a vital part of your financial aid package. And many students consider it smart debt.

After all, if borrowing money now empowers you to pursue a quality education and get a high-paying job after graduation, you may be able to pay back the loans even quicker than you expected.

See how much more money you can make with a college or trade school degree compared to just a high school diploma.

You just have to understand what type of loan you’re taking on and what the terms are. It’s important you feel comfortable with all the fine print.

 

Make It Possible

To learn more about student loans, visit https://studentaid.ed.gov/sa/types/loans/

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