What Affects Your Total Student Loan Cost?
BIG Ideas:
- The type of interest rate, length of loan term, and amount borrowed all affect your total student loan costs.
- Income-driven repayment plans on federal student loans can potentially help you lower your monthly payments but could result in increased interest costs and higher borrowing costs.
- If you choose to defer your payments until after you graduate or leave school, you’ll have to pay interest on the interest your loan is accruing while you are in school and during the deferment period unless you have a federal subsidized loan.
You haven’t gotten to college yet, but there’s a lot you already know. You probably know, for example, that school will be expensive and that you may need a loan to help you manage the costs. What you might not know yet, though, is the answer to an important question:
How can you reduce your total student loan cost?
In this article, we’ll discuss what affects your total student loan cost and provide some insights on how you can lower it.
Factors That Affect Your Total Student Loan Cost
There are several variables that affect your total student loan cost, including:
- The amount you borrow. You don’t have to be a finance guru to understand a simple fact: the more you borrow, the more it will cost. That’s why it’s important to look at ways to reduce the amount you need to borrow, like applying for scholarships and grants.It doesn’t hurt to get creative, either. To save money on college costs, you could live at home for a few semesters or spend the first two years studying at a community college. Learn more about ways to reduce the cost of college.
- Interest rates. When it comes to both private and federal student loans, your interest rate will greatly impact your monthly payment and the total amount you’ll pay. Some important things to note about interest rates:
- Rates on federal loans are generally lower than those of private loans, so exhaust all federal aid before applying for a private loan.
- With both private and federal student loans, interest rates can be fixed or variable. With a variable rate, your rate may start lower, but if rates rise, your rate and your monthly payment will increase, too. With a fixed rate, however, your rate and payment won’t change for the term of your loan.
- Rates on private student loans can vary significantly from lender to lender, so shop around. Also, when it comes to a private loan, your credit matters. Typically, the better your credit, the better rate you’ll get. So, if you don’t have established credit, consider getting a co-signer with strong credit to lower the amount of interest you’ll pay over the life of the loan.
- The term of your loan. Loan terms matter. Generally, the longer you take to pay the loan back, the more interest you’ll pay over the life of the loan. This is true for both private and federal student loans.
- Capitalized interest. When you get a student loan, you usually can defer payments until six months after graduation or leaving school. You can also usually choose to make interest-only payments or principal and interest payments while in school, which can lower your total amount of interest.
If you opt to defer payments until after graduation or leaving school, interest on your loans will capitalize. That’s a fancy way of saying you’ll pay interest on the interest you didn’t pay while you were in school or during the deferment period. If, however, you have a Direct Subsidized Loan from the federal government, the government will pay the interest on your loan while you’re in school, helping reduce interest costs.
- The repayment plan. When it comes to federal student loans, the repayment plan you choose can impact the amount of interest you pay over the life of your loan. For example, if you qualify for income-driven repayment, your monthly payments might be lower, but you may pay more in interest over the life of the loan. With a fixed repayment plan, however, you may have higher monthly payments but could end up paying less in interest over the life of the loan.
The same is true when it comes to repayment plans for private student loans, which can vary by lender. When selecting your repayment plan, just keep in mind that the longer the term you choose the more interest you’ll pay, and if you choose not to make any payments while you’re in school or during the grace period following graduation, your interest will capitalize.
Other Factors That Impact Costs
- Late payments. Missing student loan payments and paying late can cost you. You’ll not only lower your credit score (which could make future borrowing more difficult) but you may also incur costly late fees. To avoid missing payments, sign up for automatic payments. Many lenders even offer rate discounts if you pay automatically.
- Loan deferment and forbearance. If you suspend payments temporarily to reach a goal like an advanced degree, or have your payments temporarily postponed due to hardship, interest will still accrue, increasing your borrowing costs.
Know All The Costs of Borrowing
Your loan decisions can greatly impact your borrowing costs and your budget, long after college ends. Do your homework and understand what affects your total student loan cost even before you apply for loan. Your future self will thank you.
Brazos is Here to Make College Affordable
Brazos Higher Education is committed to making education more affordable for students. As a Texas non-profit, we offer great rates and no fees on private student loans. Contact us to learn more.