Historically, others have made student loans complicated. You’re thrown into a whirlwind of paperwork, hazy statistics, and confusing words. After the dust settles, you’re still not sure what you signed up for, who you’re working with, or what extra fees will be involved with your financing. What’s up with that?
As a student, you have a right to feel empowered about the steps you’re taking towards your education and your career. Before taking out a student loan, take the time to familiarize yourself with the process and the terms you see most often.
APR (Annual Percentage Rate)
Your APR is the interest rate of your loan combined with any other fees involved with your financing, including points, commissions, origination fees, or other charges through the life of the loan, divided into an annual rate. The Federal Truth in Lending Act requires every lender to disclose their APR rates, which is a great way to gauge how much your loan will actually cost. Beware of lenders who advertise “teaser rates,” giving you a range of potential APRs (for example, 1.0% - 29.27%) rather than an actual APR.
When a borrower accumulates interest on their loan, the interest amount is folded into the amount borrowed, which increases the amount that next period of interest is calculated from.
Capitalization occurs at a certain point in your loan’s life, depending on the type of loan. For federal student loans, the capitalization period begins at the end of the grace period. If you have a deferment period on your loan, capitalization will occur at the end of that period. If you put your loan into forbearance, at the end of that time, you’ll see capitalization on your loan.
Capitalization is a quick way to make the balance of your loan quickly spike up. Practice healthy financing habits, like making your monthly payment on time every month, and even paying extra on your loan if you find yourself financially capable.
If you’ve never taken out a loan, and you’re new to building credit, you will most likely be required to add a cosigner to your application. Because the lender does not have any information about you or whether or not you make on-time payments, they ask that you add someone who has a credit history to your application in order to make a more informed decision.
A cosigner is usually a parent or relative. They’re responsible for the loan if the primary borrower falls behind in their payments.
The Debt-to-Income Ratio of a loan is the ratio between the debt you’ve accumulated and your annual income. This ratio is used to predict whether or not your financial landscape enables you to pay back additional debt.
As part of your search for financing, you’ll find many debt-to-income ratio calculators online. They’re a great tool to determine if you can feasibly take out a loan.
Projected Debt-to-Income: For certain types of Skills Fund loans, we look at a Projected Debt-to-Income Ratio to determine borrower’s rates. As part of our underwriting, we compare the amount of debt you’ll take out to attend a program, and weigh it against your post-program outcomes.
If a borrower falls behind on their payments, they enter delinquency. If a borrower fails to make payments on their loan for a period of time (for federal student loans, it’s 270 consecutive days), their loan enters into a default. The lender reports the default, which impacts the borrower’s credit score.
After you’ve graduated or completed your program, many lenders give you a grace period, where you continue to make no or interest-only payments. This is seen as a great opportunity to focus on finding employment.
While you’re in your grace period, it’s important to remember that your payments will increase soon. It’s not the best time to go on a vacation or start splurging on meals—save that until after you’ve secured a great job!
Income Share Agreement (ISA)
Income Share Agreements are a new player in the educational world. Rather than charging a student upfront tuition for their program, schools are offering an incentive: pay nothing now, but pay us X amount after you graduate from your program and get a job. But before you commit to an ISA, take a second look.
The devil is in the details. ISAs are an attractive offer to many students who don’t have the financing available, but proceed with caution; if you end up with a high-paying job, the amount you give back to your school may end up being much more than what the education is actually worth.
The interest rate is part of the way that lenders generate revenue. The interest rate is the percent of the loan that the lender will require you to repay in addition to the borrowed amount. For some types of loans, including federal student loans, the interest rate is fixed, which means that it won’t change over time. Other types of loans have variable interest rates, which may change over the lifespan of your loan.
The interest rate is part of the calculation that determines your Annual Percentage Rate (also known as your APR).
When the time comes for you to start paying back your loan, you send your payments to your loan servicer. The loan servicer is different than the company that lends you the money (for example, Skills Fund’s loan servicer is Aspire Resources.) The loan servicer handles all the payments for your student loans, and also acts as the collector when borrowers fail to make payments. For questions about your repayment, auto pay, or forbearance options, you’ll want to get in touch with your loan servicer.
RoE (Return on Education)
When it comes to student loans, it’s important to look at whether or not the program or school you chose to attend will provide you with an outcome that’s worth the investment you’ve put in to it.
If you’ve put your precious time and money into an education, your education should be able to pay you back with a transformative skills training and a career jumpstart.
RoE is the driving mission behind what we do at Skills Fund. We’re on a mission to connect as many capable students as possible with a program that will give them tangible outcomes.
If you find yourself with extra funds, whether it’s a new income, loan refinancing, or winning the lottery, paying off your loans early can reap major financial benefits. Depending on the amount you’ve borrowed and your financing rates, you can find yourself saving anywhere from 10% to 25% of the cost of the typical loan length. Keep an eye out for lenders who charge an extra fee for prepayment—often called a prepayment penalty. Depending on the amount, your extra funds might serve better in an investment account like an IRA. If given the option, go for a lender that doesn’t have prepayment penalties.
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