Understanding Student Loan Terms

Before accepting any student loan you should make sure you are familiar with all of the terms of the loan. Remember that you could be paying for this student loan for many years, so it is important to make an informed decision. We have assembled a brief explanation here of many of the terms you might find on a student loan (or any type of loan for that matter). This is certainly not an exhaustive list, and you should always consult a school's financial aid administrator if you have additional questions regarding any student loan.

Interest Rate
The interest rate is arguably the most important component of any loan. 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. With these student loans you can be certain of the total amount of each 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
Student loans often have fees associated with them. These fees may be charged when you receive the money (e.g. 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's 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 - this results in a total loan principal of $1,040. It is important to understand how the lender treats all fees.

Term
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 FeaturesIncreasingly lenders are offering 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 and others. You should check with your lender to find out what types of incentives they offer before signing a loan with them.