5 Key Terms to Know About Student Loans
If you are new to borrowing student loans, or just need a refresher on some key terms, we have you covered. Our recent What to Know About Student Loans webinar took a deep dive into some key terms and ways to be a wise borrower as you consider your student loan options. If you missed it, check out the recording here. If you want to know more about some of the key terms we discussed, keep reading.
Interest rate is the percentage of the amount borrowed that the lender charges for the use of its money. Or, stated another way, interest rate is the cost to borrow money. Interest rate is expressed as a percentage, and the range of the interest rate assigned to a particular loan will be available to view before you apply. As you research student loans, you will notice that some loans only offer fixed interest rates (such as the Direct Subsidized Loan, Direct Unsubsidized Loan, and Direct PLUS Loan) while other loans, in particular private or alternative loans, offer both fixed and variable rates. For fixed interest rate loans, the rate never changes. As a result, your monthly repayment will remain the same once you being repaying the principal and interest on the loan. With variable interest rates, there is a possibility (a likely possibility) that the interest rate will change over the life of the loan, meaning your monthly repayment will change over time. If you decide to go with a variable interest rate loan, make sure you understand your starting interest rate and the highest possible interest rate.
From a budget standpoint, it is certainly easier to plan repayment with a fixed interest rate loan. With a variable interest rate, you need to be prepared that, as market conditions change, so too could your loan payment. You may also notice while researching that when comparing fixed vs. variable interest rates, some lenders will offer a better (lower) rate for the variable interest rate loan compared to the fixed. But remember that the variable rate loan could change. You are essentially making a trade off by taking a potentially higher fixed interest rate to lock in vs. risking that a variable rate loan could go up over the life of the loan.
Annual Percentage Rate (APR)
Annual Percentage Rate, or APR, is the annual cost of the loan, including fees, expressed as a percentage. Since APR includes any fees associated with borrowing the loan, it represents the true cost of the loan and, subsequently, provides the best "apples to apples" comparison between loans. Also, it's important to remember that while one loan may have a lower interest rate compared to another, the APR might be higher (depending on fees).
Repayment term specifies the length of time to repay a loan. Repayment term is typically expressed in number of years (for example, 7, 10 or 15 years). From a total cost perspective, the repayment term, along with the interest rate and APR, have a direct impact on the total cost of the loan. Assuming interest rates are the same, the longer the repayment term, the more you will pay over the life of the loan. Furthermore, as you are researching loan options, you will notice that many lenders offer multiple repayment options and the range of offered interest rates might vary depending on the repayment term.
So, why do folks choose a longer repayment term? Simply put, it provides more flexibility as families consider their monthly budget. Although choosing a longer repayment term may mean paying more in total over the life of the loan, the monthly repayment obligation will be less (again, assuming a fixed interest rate). As you're reviewing potential loan options, we encourage you to spend time working through repayment calculations based on repayment terms and the trade-offs that come with choosing one option over another.
Application and Solicitation Disclosure
Much of the information we outlined so far, along with some additional loan information, can be found on the application and solicitation disclosure. The primary reason for this form is to explain the cost of the lender's loan. It is a required document for all private student loan lenders, such as MEFA. You can find our application and solicitation disclosure under the Disclosures tab on our Undergraduate Student Loans page. Just a heads up: the application and solicitation disclosure provides estimates for total loan cost based on the highest rate offered for the corresponding loan. The final disclosure, which is provided once an individual has borrowed a loan, is more specific and more useful to determine the cost of a specific loan.
A co-borrower is someone, in many cases a parent or guardian (but of course doesn't need to be), who signs the loan agreement along with the student borrower. Many lenders will require, or strongly recommend, a co-borrower for loan approval. The reason for this is that many undergraduate students entering college for the first time may not have an established credit history, and so getting approved for a loan would be difficult without a co-borrower. As a result, adding one (or more) co-borrowers may increase the chances for approval and may help decrease the interest rate on the loan. Finally, some loans may require a co-borrower for approval but will offer, after some length of time with on-time payments, the opportunity for co-borrower release, which basically means the co-borrower will no longer be on the loan note.
That's a LOT of information. A quick recap:
- Interest Rate: A percentage charged to the borrower for borrowing the loan
- Annual Percentage Rate: The annual cost of a loan taking into account fees & repayment term
- Repayment Term: The length of time given to repay the loan
- Application and Solicitation Disclosure: Statement providing details about the loan and estimated total loan cost examples
- Co-Borrower: Another borrower on the loan equally responsible for repayment
If you're borrowing a loan for college costs, and need any assistance or have questions, we're here to help. Call our College Planning Team at (800) 449-6332 or email us at firstname.lastname@example.org.