UNDERSTANDING
INTEREST RATES
A general way of looking at interest
rates is, “How much is this loan going to cost me?” You should always consult with a school
financial aid administrator if you have additional questions regarding any
student loan.
APR (Annual Percentage Rate) represents
the total effective cost of the loan at a annual
interest rate.
It accounts for every penny a borrower is
being charged for the total loan amount,
Loan origination fees, finance charges,
and other charges such as “repayment fees” on total deferment loans with
capitalization of interest.
The APR takes into account other relevant
factors, such as the term of the loan and payment schedules.
By law, nearly all consumer loans –
including student loans – MUST disclose the loan APR. So ANY student loan you
could POSSIBLY want is going to have this key information disclosed
"clearly and conspicuously" in compliance with Regulation Z.
When you are comparing student loans,
make sure that you review the APR, and not the interest rate, finance charge or
the loan’s Index or Spread. This way you will be comparing the total cost of
credit on each loan on an “Apples to Apples” basis. This is the only way to
make a fully informed financial decision and the right financial decision for
you.
Interest rates are applied to all
loans. They are usually in the form of a
percentage. This is the rate and amount
of interest you will pay to the lender each year on the loan. Lenders must
disclose to you what the interest rate is for your loan; this rate may either
be fixed or variable.
The interest may be expressed as a simple
rate (based on the principal amount) or as an APR, which is the simple rate
plus other fees that may apply.
A fixed interest rate means the
interest rate does not change during the term of the student loan. Fixed
interest rate loans keep consistent payment over the life of the student loan.
A variable interest rate means the
interest rate may change during the term of the loan. The rate is usually
adjustable quarterly or annually, based on a standard interest rate benchmark
such as the prime rate or the U.S. Treasury bill rate. Federal Stafford loans
may be variable rate student loans; however the interest rate is generally
limited to a certain pre-specified ceiling amount.
It is important to determine whether
there are any periods when interest is not charged. For example, Federal
subsidized student loans might not accrue interest while you are in school.
However, even if a student loan accrues interest while you are in school, the
interest may be capitalized (added to the amount you need to repay later) and
on which interest is calculated.
Fees can come in the form of percentages
too!
These fees may be charged when you
receive the money (i.e. origination fees) or during the repayment of the
student loan. Additionally, there may be penalties for late payments and other
conditions.
If your student loan has origination
fees, you should understand whether these fees will be deducted from the amount
of your loan or added to the principal amount of the loan.
For instance, let us assume you are
getting a $1,000 student loan that has a 4% origination fee. In some cases the
lender will deduct the fee (in this case $40) from the amount you receive. As a
result, you would get $960 and interest is calculated on the $1,000 principal.
In other cases, the lender will add the
origination fee to the amount you wish to borrow - these result in a total loan
principal of $1,040.
It is important to understand how the
lender treats all fees.
The term of the loan refers to the number
of payments and amount of time that you will have to repay your student loan. A
longer term student loan may reduce monthly payments, but may increase
the total amount you repay.
Other lenders offer various incentives as
part of their student loans.
These may include:
reduced interest rate for a history of
on-time payments
automatic withdrawal from your checking
account
You should check with your lender to find
out what types of incentives they offer before signing a loan with them.
Truth in Lending Disclosure. This
document – sometimes referred to as the “TIL” – is sent to the borrower(s)
prior to or when the loan is consummated which is when the first check is
disbursed for the loan. It contains four (4) figures about the loan which
contain critical information for the borrower:
APR – the total effective cost of credit
expressed as a yearly rate
Finance Charge – the dollar amount of
interest if the loan is paid over its full term
Amount Financed – the amount of credit
actually available for the borrower’s use, or the net amount of credit extended
Total of Payments – the sum of the
Finance Charge and the Amount Financed
Lenders may – but are not obligated to –
disclose additional information in their correspondence with borrowers.