Understanding Student Loan Interest Rates

by Chad Agrawal

studentloansThere are probably few people who doubt the impact that higher learning has upon earning potential. Over a lifetime, a 4 year college graduate earns an average of $1 million more than a high school graduate. For this reason, college has become extremely expensive and getting adequate financing can be a tough road to tread.

There are essentially 4 separate types of loans designed to help people pay for their college education. All 4 have their advantages so choose carefully when considering an institution of higher learning. Education loans are a great way to better yourself but the interest rates could put you deep in debt before you even find a job in your field.

Student Loans

Student loans are granted to the student and are recouped with interest after the student graduates. Most student loans allow the student a grace period until they graduate and for 6 months after that. The average senior of a 4 year university graduates with $23,000 dollars in debt. With an APR of 7.95, the interest on 23 grand is $1,817 a year. This could easily be 5-7% of your initial salary. The reason so many student's end up in debt is because of Negative Amortization. This is waiting until you graduate to begin repaying a loan. You essentially allow the lender to greatly increase the outstanding balance of the loan. Basically, the difference between the repayment and the interest is added to the total amount owed to the lender. Essentially, you will be paying interest on the interest that accrued while you were still in college.

Fortunately, Negative Amortization can be avoided by simply making small monthly payments during the grace period. A wise decision would be to make payments equal to or greater than the interest, which accrues monthly. By doing so, you can save a substantial amount of money over the life of the loan.

Parent Loans

Parent Loans are loans given to the parents or legal guardians of the student. Essentially the parents have agreed to put the child through college but they don't have the money right up front. Parent loans accumulate interest as well but at least the parents have a full time income to pay the interest from month to month. Some parent loans are expected to be repaid while the student is still in school. Some parent loans, such as the PLUS loan have lower interest rates than student loans because the parent is more likely to repay.

Private Student Loans

Private or alternative loans are given by third party lenders such as banks or credit unions. These loans are not provided by the Department of Education and the fees can vary greatly from lender to lender. You should research the lender thoroughly before you accept a private loan because the interest rates have been reported to be a high as 50%. Like student loans, a private loan may require a third party to cosign.

Peer to Peer Loans

This is a relatively new trend in student loans as peer to peer (P2P) websites connect an aspiring student to a potential lender. The lender agrees to loan the student the necessary funds for their higher learning and the student agrees to repay the money they borrowed. P2P lending started in England in 2005 and since then, nearly $1 billion have been loaned to help potential students fund their education. Most P2P websites now protect the lender against borrower default and they are becoming ever more popular.

Make sure you know the terms and conditions of any loan before you sign anything. Your signature bonds you to the loan and having a student loan in default is like the death penalty to your credit (until you repay it). Be wise as you seek funding for your education and you should have no problem repaying the loan after you graduate.

About The Author

Ryan Ayers is a writer who creates informative articles in relation to education. In this article, he describes student interest loans and aims to encourage continued study with a public policy degree from New England College Online.

This post was written by Chad Agrawal

Chad Agrawal is the founder of CCTS, helping students transfer from community college to Ivy League, tier 1 or anywhere else by following this community college guide.

Leave a Comment

Previous post:

Next post: