In my first post, I discussed some of the consequences to carrying a large student debt. How there are spiritual consequences in addition to financial consequences. Hopefully the post made you think more about your situation in regards to student loans.
One thing I have found when talking to people is that they don’t really understand their loans and how they work. It seems as though many are content with taking whatever loans are offered to them and leaving it at that. Here is an article that touches a bit on the fact that many students don’t understand what they are getting into when they take out student loans. This lack of understanding is a main factor when people struggle later in life to pay back their student loans.
The goal of this post is to educate people on some of the basics of their student loans. My hope is that with a better understanding of student loans, people can make better decisions in regards to them.
First, we’re going to take a look at the different elements that make up a student loan to help us get a better understanding of the concept. There are 5 elements that we will be covering; principal, interest, interest rate, term, and repayment.
Principal. The principal is the amount of the loan that you took out. Essentially, it is the money you borrow and receive from a lender. So if you took out a $10,000 student loan, that $10,000 would be the principal.
Interest. Interest is the amount that you are charged for taking out the loan, in addition to the repayment of the principal. Interest is how lenders make money on loans. Interest is calculated using an interest rate (explained below). Most loans have a grace period, where interest is not charged. This grace period usually lasts until 6 months after a student graduates or leaves school, but it varies by loan.
Interest Rate. The interest rate is the percentage charged to the principal to determine the interest. Interest rates are displayed by their APR (annual percentage rate). However, interest is calculated in many different ways, such as annual, monthly, daily, or even continuously.
Term. The term is the amount of time the loan is for. So if you have a loan that you have to pay back in ten years, the term would be ten. However, for student loans this is not usually fixed – the term will be dictated by your minimum payment, but you can decrease the time of the loan by increasing your payments.
Repayment. Repayment is the paying back of the loan. Repayment starts when the grace period ends. Most loans usually require you to make a monthly repayment. There will be a minimum monthly repayment on the loan, however you can pay back more than the minimum if you want. You can also pay back less, however, this will cause you to be charged fees, and if you fail to meet the monthly payment for several months your loans could enter default.
So there we have it – principal, interest, interest rate, term, and repayment. I’m going to stop here for today. This part is getting a bit technical, so I don’t want to overwhelm anyone as they read this.
For the next post, I’m going to create an example of how these different elements work together. In this example, I think we will also see some of the hidden costs of student loans that people don’t see until it’s too late.