While applying for and receiving student loans is easier than in years past, many students sign up for heavy debt burdens without familiarizing themselves with important loan terms. Without knowing basic terminology, students are unable to competitively shop for loans, and choose the one that works best for them.
Here are a few key terms to know:
Principal – The total amount you borrow. Interest is calculated off of the principal. So if you take out $30,000, that 30k is the principal. Interest accrues on that amount, but any extra payments you make can be applied directly toward the principal.
Annual Percentage Rate – is the amount you’ll pay in interest each year, or the cost of borrowing the money. So, for example if a loan has a 5% “interest rate,” this means the loan will accrue 5% in interest each year. Interest rate and APR are often used interchangeably.
Term – Is a fancy word for “length of time you have to pay the money back.” So if you get a $30,000 student loan for a 15 year term, you’ll have the loan paid off in 15 years if you only make minimum payments.
Fixed vs. Variable Interest Rates – Fixed Interest Rate loans means the interest rate you sign for will remain the same over the term, or “lifetime” of the loan. So 5% fixed rate means you’ll always pay 5% of the principal. Variable interest rates are less ideal, as the interest rates could fluctuate over time; one year you could pay 4.8%, another you could pay 7. The market usually dictates variable interest rates.
Forbearance – A postponement of repayment, where interest typically accrues on the loan principal. Most student loans come with a standard forbearance of six months, meaning borrowers have six months before they begin making payments on the loan. Deferment is a similar term, but usually means interest is not accruing. Many student loans defer accruing interest until after graduation.
Origination Fee – is a fee paid to the bank for activating and handling the loan.
Prepayment – All education loans, whether they be federal or privately funded, offer penalty free pre-payment, meaning you can pay extra on the loan, or pay if off entirely before the term expires at no additional penalty.
How to Competitively Shop for Student Loans
Student loan search engines like Achieve Lending, aggregate loan offers for you. By using online tools and knowing the differences in loan terms such as principal, fixed and variable interest rates, and which fees to look out for, potential borrowers can competitively shop for student loans and choose the deal that is right for their lifestyle and budget. Some may enjoy a fixed interest rate with a shorter loan payment if they are more aggressive savers and want to be debt free as soon as possible, while others may seek a slightly higher interest rate with a lower monthly payment. It all depends on each specific situation, but student loan search engines like Achieve Lending can make the shopping process simpler while you put your knowledge to the test.
Educating yourself on loan terminology will allow you to best compare the differences between the different types of loans you are offered. When thousands of dollars are on the line, it is important to arm yourself with the most knowledge possible in order to get the best deal and save money.
Allen Kors is the Founder and CEO of Achieve Lending, the first ever search engine for education loans. Designed to help both traditional and non-traditional students find the best student loans, Achieve Lending offers users a free online portal to search, find, and compare student loans, often in as little as 30 seconds. After leaving his job in angel investing to pursue entrepreneurship and form his own financial technology company, Kors now aims to build the ‘Kayak’ for education loans and empower Achieve Lending users by providing financial education on the loan process and terminology.
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