Interest is essentially the price you pay to borrow money. So, in addition to the original sum of the loan, you pay an additional percentage that is determined by the lender when you take out the loan.
Tip:Federal loans and many private lenders offer a 0.25% interest rate discount when you sign up to have your payments automatically deducted from your bank account.
Calculates the interest once on the amount of your loan. So, if the rate on a $10,000 loan is 5%, you would pay $500 for total interest on the loan. All federal student loans and most private loans use simple interest.
This isn’t ideal if you are paying student loans. What it essentially means is that you are always paying interest on your interest. In other words, your daily interest rate is applied to the principal plus any unpaid interest. This type of loan can add thousands of dollars to the amount of your loan and take longer to pay back!
For example, if you borrow $10,000 at 5% that compounds annually, and you make the minimum payments (which would be about $106/m), the total interest you would pay over the course of the loan jumps to $2,728!
Something else you should know is that you begin paying interest the moment you take out your student loan, not when you start repaying it. The good news is that most student loans let you defer the interest payments until you graduate and you are earning an income.
Learn More About Interest Rates For Federal Student Loans
They start to feel the power of taking back control of their personal and professional life.