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Student loans may seem complex, but even if you breezed over the fine print when accepting your loan, it’s never too late to catch up. Whether you just graduated or have been out of school for a couple years, understanding the basics of your student loans can save you money in the long run.
Here are nine things you should know about your student loans that will help the repayment process.
- The difference between variable and fixed interest rates
The type of interest rate on your student loan has the potential to hugely impact your future payments. Fixed rate loans never change, meaning the interest rate of your loan will remain the same over the lifetime of the loan. However, variable rates are calculated by your lender either monthly or quarterly, so your payment amount may change based on market conditions. Variable rates are currently very competitive, but knowing if you have them is very beneficial if rates begin to rise.
- What is the difference between subsidized and unsubsidized federal loans
The important difference between subsidized and unsubsidized loans is that you must demonstrate financial need for a subsidized loan. As long as you are enrolled in school at least half-time, the government pays your interest until graduation (plus a six-month grace period). An unsubsidized loan does not require you to demonstrate financial need, but you are responsible for paying interest while in school. This is good to know because if you choose to put your loans in deferment, the same stipulations apply.
- What no prepayment fees mean
No lender, either federal or private, can charge a fee or penalty if you prepay your student loan. This applies to both making extra payments over time and paying off your entire balance early. Adding a few extra dollars each month can be a very cost effective way to reduce your repayment length and the total amount paid for your loans.
- The implication of short versus long repayment terms
Paying off your student loan on a short-term repayment plan may result in higher monthly payments, but you’ll ultimately pay less interest over the life of the loan. Longer repayment terms, on the other hand, likely means you’ll pay significantly more interest over the years, even if your monthly payment amount seems low. Consider readjusting your terms to a repayment strategy that best fits your needs.
- The meaning of forbearance
Forbearance allows you to stop making loan payments (or have them reduced) for up to 12 months, although interest still accrues. Mandatory forbearance is available for a number of circumstances, such as certain professional internships or national service positions. In the case of financial hardship or an illness, you can apply for a discretionary forbearance, which may or may not be approved by your lender.
- What deferment means
Deferment is an allowance to stop making payments on both your principal and interest, though the specifics vary based on whether your loan is federal or private. You can defer your loan for a number of reasons, including unemployment, scholarship, and returning to college or active military service.
- When your grace period ends
After graduating, many lenders offer a grace period in which you are not required to make any payments on your loan. To find out if you have a grace period, read the promissory note you received when accepting your loan or call your lender directly.
- If you might be eligible for loan forgiveness
Most loan forgiveness programs only apply to federal student loans, which offer programs for both teacher and public service loan forgiveness. However, it never hurts to check with your individual lender to see what forgiveness options may be available to you.
- The difference between student loan consolidation and refinancing
Consolidation allows you to combine all of your loans into one convenient payment. Your interest rate will be a weighted average of your existing loans for a consolidation. For a refinancing, you will be offered a new (sometimes lower rate) for your student loans. Additionally, one of the benefits of a refinancing is the consolidation of your loans into a single consolidated payment.
Visit Credible to easily find out how much you could save by refinancing your student loans.