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Paying for College

Word of the Day Wednesday: Repayment Types

Each Wednesday, MEFA will feature a Word of the Day, in which we’ll highlight a word (or sometimes a phrase) related to the college planning process. This summer, we’re focusing on vocabulary related to college loans, and will highlight words you may come across on your loan application, solicitation disclosure, or a lender’s website.


Today’s Word of the Day is actually a three-for-one! We're explaining the difference between Immediate, Interest-Only,and Deferred Repayment.

With Immediate Repayment, monthly repayments begin soon after the loan is borrowed, usually sometime during the student’s current academic year, after the loan funds are fully disbursed to the school.

With Interest-Only Repayment, monthly repayment of the interest accrued on the loan begins soon after the loan is borrowed, usually sometime during the student’s current academic year, after the loan funds have been fully disbursed to the school. The monthly repayment amount will increase to include both the interest and the principal (the original amount borrowed), once the student graduates or leaves school.

With Deferred Repayment, monthly repayments generally don’t begin until the student graduates or leaves school.

What does this mean for you?

You’ll need to be prepared for the amount and timing of your monthly repayment, based on the type of loan you borrow.

As Immediate Repayment loans require repayment soon after the loan is borrowed, you’ll need to be prepared for that monthly expense while the student is in school. Keep in mind that you may already have a monthly payment obligation as part of the college’s monthly payment plan.

With Interest-Only Repayment, you’ll still need to be prepared for a monthly payment while the student is in school, though that payment amount will be relatively low. Once the student graduates or leaves school, you’re monthly payment will rise, often significantly, so you’ll want to make sure your budget is ready for that increase.

Though Deferred Repayment doesn't require any payment until the student has graduated or left school, it is the most expensive loan option, as interest will accrue the entire time the student attends school.

Many loan programs will offer a lower interest rate if you select a loan that requires some type of repayment while the student is in school. And for all loan options, the sooner you repay the loan, the lower the total cost of the loan. Most loan programs don’t penalize for early repayment, so try to pay more than your required monthly loan repayment amount whenever possible.

Still have questions about types of loan repayment? Ask them in the comment section below – we’ll get right back to you with clarification. And remember to check back next Wednesday for our next Word of the Day!

 





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