What You Need to Know About Your Student Loan Balance
Understanding your student loans is the first step to managing them responsibly. You may not fully grasp exactly what your student loan entails when you take one out, and once repayment starts, it is easy to feel overwhelmed.
First, it is important to know what type of loan you have. Most student loans fall under one of two categories: private student loans held by independent financial institutions and federal student loans held by the federal government. Your loan rates and terms are set by your promissory note, which is issued when you receive your student loan. Loans usually have a life cycle that includes the time you are in school and receiving funding, a grace period after you graduate or stop going to school usually lasting around six months, and the repayment period in which you are required to pay back the money borrowed. Your student loan balance depends on the type of loan you received, the amount of money you borrowed, the length of your loan, and the interest rates you agreed to.
Terminology Associated With Loan Balances
Much of the jargon that goes along with your financial statements can be difficult to comprehend. The terms associated with the balance on your student loans you need to understand include:
- Repayment period
- Loan holder
- Loan servicer
- Capitalized interest
- Loan fee
Your repayment period can range from 10 to 30 years, depending on the terms of your loan. This is the maximum time you have to repay your loan. The principal includes your loan amount and also any capitalized interest, and it is often referred to as your outstanding principal balance. This is the total amount of money that you will need to pay back over the life of your loan.
Interest refers to the cost to borrow money and is calculated based on a percentage of your outstanding principal balance. Congress sets student loan interest rates, and it is generally between 3.4 and 6.8 percent, depending on financial need, as published by Business Week. Interest on most student loans accrues daily. If you do not pay your interest as it accrues, your interest is then capitalized or added to your principal amount, likely increasing your monthly payments and total amount owed.
It is also important to know who holds your student loan as well as who services it. The loan holder is usually the lender you took your loan out from, and it is the institution that has your loan promissory note and to whom you owe your money. Loans are commonly bought and sold, however, so this can change. Lenders are required to notify you of any changes.
Loan servicers maintain loans on behalf of the loan holders and handle all administrative duties including collecting the money. Student loans also carry a loan fee that affects the amount of funds you actually receive. You are still required to pay back the whole, or gross, amount. This means that a percentage of your total loan amount is deducted proportionally from each disbursement you receive, and the amount is disclosed in a statement after your first disbursement.
How to Check Your Balance
You should always keep up with your student loan balance and understand how much you owe on principal, interest, and capitalized interest at any point. If you hold a federal student loan, the U.S. Department of Education has a centralized database that can help you keep track of all your financial aid information. The National Student Loan Data System holds all your loan information, and it is easy to gain access in order to help you manage the balance of your student loan.