How well did students understand the terms of the agreement when they signed their student loans? Interest rates, for instance, are among the most complex aspects of student loans, and it takes research to have a good understanding of how interest rates are set, how interest accrues, and how payments are set to go to the principal balance and interest charges.
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The interest rate pertains to how much one has to pay in order to borrow the funds. It’s the additional cost one pays on top of the principal – in short, it’s the cost of doing business with the lender. Interest is a percentage of the principal, and it’s charged daily, so the longer it takes to pay off the balance, the most interest piles up.
A borrower’s required loan payment is the same every month, but when payment is made, interest is paid before any money goes into reducing the principal. The interest rate, with student loans typically compounded every day, is divided by the number of days in the year. The borrower is charged each day based on their outstanding balance.
With a $10,000 balance and at 4.45 percent interest rate, the daily interest rate is computed by dividing 4.45 percent by 365 in order to get 0.012 percent. That’s $1.20 based on the $10,000, and $1.20 is added to the loan balance, bringing it to $10,001.20. When interest is compounded the next day, one will pay interest on that total amount, which looks like $455.02 in interest by year’s end.
If one is able to do so, it’s recommended to make interest payments while in school to save money in the long run.
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Performance SLC assists those who need help with their federal student loans by providing consulting and document processing services. Learn more by visiting this website.
