Helping Students Understand How Student Loan Interest Accrues


Did you know that about 45 million Americans — that’s approximately one in every eight! — have student loans? Borrowing money to pay for school is a common rite of passage for a huge percentage of people, but it’s less common that borrowers have a deep understanding of how interest accrues on these loans and how that impacts repayment. Here’s a breakdown you can share with your student borrowers to help them understand their financial commitment.


Types of loans


The Department of Education is the governing body for originating new direct loans, and there are three main types of loans that borrowers and their families can take out:

  • Subsidized loans. These loans are available for undergraduate students who demonstrate financial need.

  • Unsubsidized loans. These loans are available for undergraduate, graduate, and professional students, independent of financial need.

  • PLUS loans. These loans are available to graduate and professional students as well as parents of dependent undergraduate students to help pay for education expenses that aren’t covered by other financial aid.

Interest and repayment


Generally speaking, interest accrues daily on federal student loans at rates that are fixed for the life of the loan. The different types of loans accrue interest in different ways, too. Subsidized loans generally don’t accrue interest while the borrower is 1) enrolled in school at least part-time, 2) in a grace period, or 3) in deferment. Conversely, unsubsidized and PLUS loans do accrue interest during those times.


Interest factors into repayment, too. Under some income-driven plans, the government may pay all or a portion of the accrued interest due each month for a specified period, depending on the plan and the loan. Borrowers’ monthly payments are first applied to unpaid interest and then to outstanding principal until the loan is paid off.


It’s important to note that during periods of paused or income-driven repayments, interest can still accrue and the balance may grow; additionally, interest still accrues if a loan is in default.


Interest capitalization


Another consideration is interest capitalization, which occurs when unpaid interest is added to the principal amount of a student loan. Put simply, when the interest on a borrower’s federal student loan is not paid as it accrues, and it’s during a period when they’re responsible for paying the interest, a lender can opt to capitalize the unpaid interest.


There are several times in which interest capitalization can occur during the repayment process, including:

  • After the grace period. When borrowers enter repayment after their six-month grace period, all unpaid interest is added to their outstanding balances, increasing the principal balance on which interest is calculated before borrowers make their first payments.

  • After deferments and forbearances. All unpaid interest at the end of one or a series of consecutive deferments or forbearances is added to the principal. This includes unpaid interest that accrued during the period of suspended payment and before payments were paused.

  • Income-driven repayment. All unpaid interest capitalizes when borrowers change, exit, or become ineligible for reduced payments under an income-driven repayment plan.

  • Consolidation and default. Additionally, unpaid interest also capitalizes when borrowers either consolidate or default on their loans. For certain borrowers, unpaid interest also capitalizes when exiting default.

Interest plays an important role in the student loan repayment process, and educating borrowers on how interest accrual works is an important part in helping them avoid default. PTI provides state-of-the-art software platforms that help you partner with your student borrowers to ensure successful repayment.


How can we help your organization? Call (657) 232-4353 or email info@prioritytech.com for a free consultation or more information.


Search By Tags
No tags yet.
Follow Us
  • Facebook Basic Square
  • Twitter Basic Square
  • Google+ Basic Square

Never Miss an Update!

Default Prevention news in your inbox

Products
Company
Community
  • Facebook - Black Circle
  • LinkedIn - Black Circle

We are a software development company specializing in financial management software for higher education institutions, government and other industries.

14301 FNB Pkwy, Suite 215

Omaha, NE 68154

Email: Info@prioritytech.com

Phone: (657) 232-4353

© 2018 Priority Technologies LLC