Understanding The Interest and Principal on Student Loans


When it comes to student loans, it is essential to be knowledgeable about certain terms and conditions for better decision-making. For a start, this is the money you borrow to pay specific bills such as tuition, books, supplies, living expenses, and other student needs. Student loans often go into repayment once you graduate or leave school and avoiding paying these loans can affect your credit score and not to mention that your loan holder or lender can take you to court. That is why you must have control over how you can pay the money you borrowed and live a debt-free life. In fact, you have options to choose from that may depend on your income.

Student loans involve interest and principal, which are two important terms you must understand before adding to your balance. Additionally, make sure you’re knowledgeable about student loans, or you can check out this link https://thebestschools.org/resources/college-finances/about-student-loans/. All these things may seem confusing at first which is why this article will show you ways to pay off your debt, but first, here is a quick recap to understand how everything works.

What Is Interest?

It is the amount of money you have to pay to borrow the funds, and it often ranges from 3.73%-6.28%. When the money has arrived, that is when it starts accruing or accumulating, and it can be charged daily or monthly depending on the terms. There is also a payment schedule that involves how many payments you have to make. However, for students, there are two types of loans which are subsidized and unsubsidized.

Subsidized

Subsidized loans are offered to students who truly need the funds, and if one qualifies, the government will cover your interest while you are still in school. This makes it easier for the student since the money you borrowed (balance) does not increase. However, once you graduate the everything is now yours to pay.

Unsubsidized

This type of loan means that the person is responsible for paying the interest from day one or the moment the funds arrive. If you are a full-time student or if you are not required to make payments yet, the interest will continue to increase, and the balance you will be paying when you graduate will be much bigger. Overall, the accrued interest is added to your principal balance, which is the total amount you owe.

On the bright side, you have options when it comes to paying the debt. It is either you pay the interest, or you pay the principal. However, the income you make may affect your decision.

What Is Principal?

The principal balance is the amount of money you borrowed, and it would also include the interest and other fees. As most people may know, it is required to pay a minimum amount per month. However, this payment goes to the overall total of the balance, interest, and fees. If it takes a bit longer to pay the balance, the interest will increase as well, turning into bigger debt. That is why there is a payment option where you can pay extra or in advance that goes directly to your principal balance.

Here is where you will have to decide what option is best for you to get that debt-free life. Although it is quite normal to only pay the minimum amount per month, it will take some time for the debt to be fully paid. Now, is it better to pay off interest or principal on student loans or not? Well, both of which have their own benefits.

However, in some cases, a principal-only payment is beneficial when it comes to financial health. An increasing interest may buy you some time, but it enlarges your debt.

Benefits Of Principal-Only Payment

Save Money

The sooner you pay your balance, the less interest there will be. It is easily understood that lesser interest means more savings in the long run. With extra cash, you will have the next step to your other financial goals, such as a down payment on a house or a car.

Establishes Good Habits

Developing a habit like this involves discipline and determination to get it done sooner than later. Sure, it is tempting to ignore your debts for a while and get back to them when you have extra cash, but that will also mean losing more money.

Finish Your Loan Early

Nothing is more fulfilling than paying off a debt earlier than you expected. Principal-Only payments go directly into your balance, preventing a huge interest rate and allowing you to pay your loan faster (read more). You will gain financial freedom in the long run when you have zero debts.

Improves Credit Profile

Other than feeling accomplished with paying off your loan, it also improves your credit profile and history, which means it is more beneficial when it comes to other areas such as car loans. Not to mention that it lowers the cost of borrowing or interest in other places as well.

Things To Remember

  1. Make Sure You Can Afford It

Committing to this type of payment means that you need to ensure that you can afford it. That is why it is essential to consider your income before you commit to Principal-Only payment. Not only that but being in a financially stable state will lessen your stress about the debt.

  1. Know All the Details

In some cases, some lenders require a fee when you finish your loan early before its term expires. This is called a prepayment penalty. It helps lenders compensate for the interest money they would lose when the debt is paid early. This may or may not apply to student loans but always make sure to know all the details before you close the deal.

Jeff Campbell

Jeff Campbell is a husband, father, martial artist, budget-master, Disney-addict, musician, and recovering foodie having spent over 2 decades as a leader for Whole Foods Market. Click to learn more about me

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