Why your student loans could cost a lot more than what you originally borrowed

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Student loan debt in the United States is no joke. In 2018, 44 million borrowers of about $ 1.5 trillion. And for those students who are just starting to navigate the task of paying for college, determine the types of loans they can take out and how much they can borrow can be pretty complicated, before you even think about what their repayment process will look like down the road. But, it is important to plan for this as early as possible, especially given the financial burden of student loan interest. As a result, what you end up owing could be much more than what you originally borrowed. Here’s why and how you can minimize expenses.

Not all student loan interest is equal

All student loans come with interest, but the rate of interest and how much you have to pay depends on the type of loan you take out. “Borrowers with federal subsidized student loans do not have to pay the interest that accrues while they are in school, during their grace period [the first six months after leaving school] and during postponement periods, ”said Teddy Nykiel, a student loan expert for Nerdwallet. “Deferring federal loans is a way to temporarily suspend payments during times of poverty, unemployment [or] active military service. If you have a federal unsubsidized loan or a private loan – the latter being issued by a bank, credit union or other lender – you are responsible for paying interest accrued during all of these periods.

The federal student loan interest rate is fixed by Congress each year, is the same for everyone, and is fixed for the duration of your loan. That said, if Congress changes the rate from year to year, you could potentially pay a different interest rate for each school year you take out a loan. “For example, an undergraduate student who took out an unsubsidized loan for the 2017-2018 school year has a rate of 4.45% for that loan,” Nykiel explained. “If they take out another loan in 2018-19, the rate will be 5.05% because federal student loan rates have increased this school year. But the student will repay the first loan at 4.45% and the second loan at 5.05% because the rates are fixed.

Private loans are another story, however. The interest rates are set by the lenders, based on your credit and financial history. “Different borrowers get different private student loan rates, but in general the better credit history you or your co-signer has, the lower the rate you will qualify for,” Nykiel said, adding that students without credit or bad credit will be hard- pressed to qualify for private loans without co-signers. “But they could take out a federal student loan and have the same interest rate as someone with great credit,” she said.

The interest rates for private loans can be fixed or variable, the last sense the rate you pay may fluctuate depending on the market. Nykiel recommended comparing private student loan rates with federal rates, keeping in mind the additional advantages of federal loans. such as longer deferrals / abstentions, income-based repayment plans and loan forgiveness.

Interest accrues daily, no matter if you make payments

Many loans (including federal loans and some private loans) don’t require you to start making payments until you graduate, but that doesn’t mean interest doesn’t accrue. “A lot of borrowers don’t realize… that interest accumulates while they’re in school,” Nykiel said. “This means they will owe more than what they originally borrowed before even going into repayment.”

And that doesn’t just apply to your school years, but also to deferral or withholding periods, which are times when you can temporarily stop or reduce your payments. The main difference between the two, according to the US Department of Education, is that in some cases of federal loan deferral (listed on the department’s website), you may not have to repay the interest accrued during this period. “This interest builds up quickly, making withholding a very expensive repayment option,” Nykiel said, noting a NerdWallet Study found that in the third quarter of 2018, 2.6 million student loan recipients had outstanding federal loans, with an average balance of $ 43,538. “Keeping a loan with that balance in forborne for 12 months would add an additional $ 2,199 to the balance, assuming an interest rate of 5.05% (the federal interest rate for subsidized and unsubsidized undergraduate loans in 2018-19), ”she said.

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Nykiel said borrowers will generally end up accumulating the same amount of interest per day, incorporated into each monthly payment throughout the loan repayment period (“they don’t pay interest on interest accrued the day before” ), but there are cases of loan capitalization, which means that the interest you have accrued will be added to your principal balance. So if you’ve taken out $ 20,000 in loans and accrued $ 1,000 in interest throughout college, the interest you owe once the repayment begins will be a percentage of $ 21,000 – the original loan plus the interest already accrued. According to NerdWallet, capitalization occurs in several scenariosincluding after the end of grace periods or deferment / forbearance periods and if you are in Income-based repayment plan.

If you are not sure how much interest you will need to pay, you can use NerdWallet calculator Understand. Keep in mind that private loans have rules determined by individual lenders which may require further calculations.

You may be able to lower your interest rate after you take out the loan

If you have private loans, you aren’t necessarily stuck with the interest rate you got when you first took out the loan. “Many borrowers don’t know they can refinance student loans to save on interest, ”Nykiel said. If your credit history or financial situation has changed, you may be able to refinance your loan with another lender and get a better rate. “Borrowers save money if the new loan has a lower interest rate and a repayment schedule short enough that it doesn’t cost more over time,” Nykiel said.

Interest can be minimized by making payments while studying

One way to minimize your interest payments and avoid compounding woes is to start. repay the interest while you are still in school (or during the grace period after graduation). That way, once you start repaying, it will only be on the original amount you borrowed and the interest it currently accumulates, rather than the interest accrued throughout your years of study.

Another surefire way to minimize the amount of interest you pay is to pay off your loans as quickly as possible – including, Nykiel advised, avoiding income-related repayments if you can. “These plans are great for low income borrowers because they can lower monthly payments,” she said. “But they also increase the amount of interest borrowers pay over time by extending the loan term from 10 to 20 or 25 years.”

With that said, it’s important to keep your other financial goals and responsibilities in mind, and balance those expenses with potential increases in your student loan payments. Nykiel noted, “We generally recommend borrowers build emergency savings, contribute to retirement accounts, and pay off other high-interest debt before prepaying student loans.”


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