How does student loan interest work?

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    StellarFi
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    Team StellarFi
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    When you borrow any loan, you pay back two components: the principal and interest. The principal is part of the original amount you borrowed and the interest is the amount you pay to borrow money expressed as a percentage. There may be additional fees like late payment and disbursement fees which add to your loan amount. 

    The U.S. Congress sets the interest rates for student loans but private lenders set their interest rates. Depending on several factors, a major part of your payment may go towards the interest rather than the principal.

    When you take out either a private or federal student loan, you have to sign a promissory note that will contain all the terms and conditions of the loan granted including how much you borrowed, the interest rates, when your first payment is due, your payment schedule, and grace period. 

    • Depending on the type of loan, your interest may accrue (accumulate or add up) either monthly or daily. 
    • Interest may also capitalize – get added to the principal amount. After this, new interest rates will be calculated based on the new principal amount.
    • Based on the type of loan you have borrowed, your first payment date may be either while you are in school or defer (postpone) payments until after you graduate. 
    • Federal subsidized loans based on financial need require borrowers to begin paying back the loan six months after graduation. The government pays the interest rate accrued while the student is in college and during the six-month grace period after graduation. The borrower pays the Interest accrued after that.
    • With federal unsubsidized loans, borrowers pay all the interest accrued, including during the time they are enrolled in school. While they don’t have to start making payments until they leave school, interest continues to accrue during this time which is capitalized later.
    • With private loans too, interest accrues while you are in college. Not all private lenders let you defer repayments until you finish school so you may have to pay a fixed amount while enrolled in school as well. Either way, interest continues to accrue.
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StellarFinance, Inc. and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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