Several months before graduating
from college, I and a group of my classmates gathered in one of the prettiest
rooms on campus. On this particular day, the room was filled with financial aid
office employees poised to give lots of boring PowerPoint presentations.
Each of us were handed a shiny,
new folder with a photo of a college senior in a cap and gown, holding a
diploma. I remember looking at that photo and thinking, “I made it!”
Then I opened the folder and saw
that the inside pocket was filled with papers listing all the loans I had taken
out over the previous four years. Instead of listening to what the nice
financial aid people were talking about during the hour-long presentation, I
sat there and added up my total student debt amount. When I left the room that
day, it felt like I had a $36,000 monkey
on my back.
The amount owed was given to me
in understandable, black-and-white numbers: $36,000. However, this was just the
principal. Understanding the interest that was being charged and coming to
grips with how much interest I
would be paying over the course of the loan payoff was complicated and painful.
I had no idea how student loan
interest worked the day that I entered that financial exit interview, but I
would like that to not be the case for you.
Below, I’ll help you answer the
question “how does student loan interest work?” based on my own experience paying
off over $40,000 of student loan principal and interest charges:
Federal
Vs. Private Student Loan Interest Rates
The
first thing you want to do is to divide up your student loans into two
categories: federal and private. This is because these two
types of loans are treated differently in a variety of ways (such as in the consolidation
process, repayment options, and interest accruement.
Federal student loans are sourced
through the US Department of Education and will be called Direct Subsidized
Loans and Direct Unsubsidized Loans, Direct PLUS loans, or Federal Perkins
Loans. Private student loans are sourced from banks, credit unions, state
agencies, or your school itself.
The interest rates on federal
student loans are prescribed by law and are usually no higher than 8%.
There are no limits on interest rates for private student loans, which means
they can vary depending on the lender and the borrower.
Several months
before graduating from college, I and a group of my classmates gathered in one
of the prettiest rooms on campus. On this particular day, the room was filled
with financial aid office employees poised to give lots of boring PowerPoint
presentations.
Each of us were
handed a shiny, new folder with a photo of a college senior in a cap and gown,
holding a diploma. I remember looking at that photo and thinking, “I made it!”
Then I opened the
folder and saw that the inside pocket was filled with papers listing all the
loans I had taken out over the previous four years. Instead of listening to
what the nice financial aid people were talking about during the hour-long
presentation, I sat there and added up my total student debt amount. When I
left the room that day, it felt like I had a $36,000 monkey on my back.
The amount owed was
given to me in understandable, black-and-white numbers: $36,000. However, this
was just the principal. Understanding the interest that was being charged and
coming to grips with how much interest I would be paying over the course of the
loan payoff was complicated and painful.
I had no idea how
student loan interest worked the day that I entered that financial exit
interview, but I would like that to not be the case for you.
Below, I’ll help you answer the question “how does student
loan interest work?” based on my own experience paying off over $40,000 of
student loan principal and interest charges:
Federal Vs. Private Student Loan Interest Rates
The first thing you want to do is to divide up your student
loans into two categories: federal and private. This is because these two types
of loans are treated differently in a variety of ways (such as in the
consolidation process, repayment options, and interest accruement.
Federal student loans are sourced through the US Department
of Education and will be called Direct Subsidized Loans and Direct Unsubsidized
Loans, Direct PLUS loans, or Federal Perkins Loans. Private student loans are
sourced from banks, credit unions, state agencies, or your school itself.
The interest rates on federal Education Loan
Calculator are prescribed by law and are usually no higher than 8%. There
are no limits on interest rates for private student loans, which means they can
vary depending on the lender and the borrower.
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