Student loans, as with any other types of loans, involve paying interest rates on top of the amount that you borrow. Factors such as the amount of the loan and the interest rate determine how much the dollar amount of interest is that a borrower needs to pay. As borrowers begin to pay off the loan, in the early stages most of what you pay most likely goes to the interest charges on the loan and just a small part of your payment goes towards repaying the actual amount of the loan.
Lending institutions provide a quote on the interest rate each time before they process a student loan application. Each year, this will be charged to the loan balance. If we for example take an unsubsidized student loan with an interest of 7% per annum, this means that each year the borrower will need to pay $70 for each amount of $1000 that is left unpaid. There are some student loans that require a variable interest rate, depending on the quote that the borrower provides. In such case, the interest charges change based on an index rate such as the Canadian prime rate.
There are times when student loan borrowers get to enjoy interest-free periods because the loans are subsidized. In subsidized student loans, there may be third parties involved that pays the interest on the loan during specific time periods. As an example, the government may have grants and pay all interest charges on all applicable student loans while the borrowers are still in school. The subsidized period may sometimes be even be extended with a grace period between graduation and as the repayment begins. Subsidized loans can help students big time when they begin to pay off their student loans because it keeps them from owing more money on the loan than the actual amount that they borrowed.
The monthly interest charges may vary and is affected by different factors such as the balance on the loan and the time that has elapsed since the last payment was made. To compute for the interest charge, multiply the daily interest rate by how many days it has been since the last payment was made. You then multiply the resulting amount to the previous balance on the loan. If you’re wondering how to get the daily interest rate, just divide the annual interest rate by 365.25. If we take a loan for example with an annual interest rate of 6.8%, the daily interest rate will be 0.0186 percent.
During the time period that you aren’t able to repay the loan, the interest will capitalize at the end of the period as the interest accrues. This means that the interest charges on the loan that accrues after a period will be added to the body of the loan. The calculation of future interest charges will be based on the new loan balance instead of the balance before the interest was capitalized.
A better understanding of how student loans work and their interest charges can help you better manage your payments in the future.
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