You've decided to pursue a master's degree, so congrats! You deserve it. It is both an investment and a once-in-a-lifetime chance.
It's important to consider how you will pay for your studies, regardless of whether you have already applied to your dream school or have been accepted.
These are the 11 key terms you need to understand if you're considering taking out a student loan before looking for a lender for an overseas study loan.
By avoiding this step, you could avoid paying thousands of dollars in interest and being trapped in an unfavourable long-term loan.
Principal
The principal is the original amount of the loan that is borrowed. It is the amount of money the borrower receives and is responsible for repaying. The principal is typically the most significant portion of the total loan amount. It is used to finance education-related expenses such as tuition, room and board, books, and other fees. It is the original sum borrowed on interest charged.
Interest
Interest is the loan's cost, usually expressed as a percentage of the principal. It is the amount that the borrower must pay the lender in addition to the principal for the use of the money. Interest is typically a percentage of the loan amount and is charged over the repayment term.
The interest rate on a loan can be fixed or variable. A fixed interest rate means that the rate will not change over the life of the loan, while a variable interest rate may change based on market conditions. The interest rate on a loan also depends on the borrower's creditworthiness, and students with no credit or bad credit scores are often required to pay a higher interest rate.
When calculating the interest on a loan, it is essential to consider the annual percentage rate (APR), which includes the interest rate and any other costs associated with the loan, such as origination fees or additional charges.
Repayment term
The repayment term is the period over which the loan must be repaid. It is when the borrower has to repay the loan to the lender. The repayment term can vary depending on the type of loan and the lender, but it is usually between 10 to 30 years.
There are multiple repayment plan options for federal student loans, such as the Standard Repayment Plan, Graduated Repayment Plan, Extended Repayment Plan, and Income-Driven Repayment Plans. Each plan has a different repayment term and monthly payment amount, and the borrower can choose the best method for their financial situation.
The borrower needs to consider their current and future financial situation when choosing a repayment plan, as a longer repayment term may result in paying more in interest over time, while a shorter repayment term may result in higher monthly payments.
Grace Period
The grace period is the period after graduation or leaving school during which the borrower is not required to make payments on the loan. It is a specified period during which the borrower is given time to get financially stable and find a job before starting to repay the loan.
For federal student loans, the grace period is typically six months after the borrower graduates, leaves school, or drops below half-time enrollment. During this time, no payments are due, and the borrower is not charged interest on the loan. However, it is essential to note that interest will accrue during this time and will be capitalised (added to the principal) when repayment begins.
It's important to note that some private student loans may not have a grace period or a shorter grace period, so it's essential to check with the lender for the specific terms of the loan.
It's also essential for the borrower to be aware of the grace period start and end date and make sure to take action to either start repayment or apply for a repayment plan before the end of the grace period.
Consolidation
Consolidation is the process of combining multiple loans into one loan with a single monthly payment. This can simplify loan repayment by consolidating various loans with different interest rates, repayment terms, and monthly payment amounts into a single loan with one interest rate and repayment term.
Federal student loan consolidation is done through the Federal Direct Consolidation Loan program. This program allows borrowers to combine one or more federal student loans into a new consolidation loan with a new interest rate based on the weighted average of the interest rates of the loans being consolidated.
Consolidation can benefit borrowers with multiple student loans with different interest rates and repayment terms, as it can lead to a lower overall interest rate, lower monthly payments, and a longer repayment term. However, it's important to note that consolidating a loan may extend the repayment period and result in paying more interest over the loan's life.
It's also important to note that private student loans cannot be consolidated with federal loans; they will have to be reduced through personal consolidation loans or refinance.
Cosigner
A cosigner is a person who guarantees the loan by promising to repay the loan if the borrower is unable to do so. A cosigner is usually a parent, guardian or relative with good credit and income and willing to help the borrower obtain a loan.
A cosigner can increase the chances of a loan application being approved, particularly for students or young adults with little or no credit history or low income. The cosigner is also responsible for repaying the loan if the borrower cannot do so.
Cosigners are usually required for private student loans as they are considered higher-risk loans. Cosigners are also commonly required for students with no credit or bad credit scores.
The borrower needs to understand that being a cosigner is a serious responsibility, and the cosigner's credit will be affected if the borrower defaults on the loan. The cosigner should be willing and able to repay the loan if necessary and should be aware of the terms and conditions of the loan.
Deferment
Deferment is when the borrower is not required to make payments on the loan. During the suspension, the borrower can temporarily postpone or reduce loan payments. Interest may or may not accrue during the deferment period, depending on the type of loan.
Federal student loans have several options for deferment, including in-school suspension, unemployment deferment, and economic hardship deferment. For example, in-school suspension is available for borrowers enrolled at least half-time in an eligible school. During this time, payments are postponed, and no interest accrues on subsidised loans.
During a deferment, the borrower must understand that the loan continues to accrue interest. This means that when the deferment period is over, the borrower will be responsible for repaying the loan, including the claim accumulated during the deferment period. It's important to note that not all loans have deferment options, and some private student loans do not offer deferment.
It's also essential for the borrower to know the deferment start and end date and apply for a repayment plan before the end of the deferment period.
Forbearance
Forbearance is when the lender agrees to postpone or reduce loan payments for the borrower temporarily. It's important to note that interest continues to accrue during the period, which can increase the total amount of the loan.
Subsidised loan
A Subsidized loan is a loan for which the government pays the interest while the borrower is in school. The borrower is not responsible for paying the interest while they are in school, which can help keep the loan's overall cost down. This type of loan can be helpful for students who are struggling to afford the cost of their education and cannot pay the interest on their loans while in school.
Unsubsidised loan
On the other hand, an Unsubsidized loan is a loan for which the borrower is responsible for paying the interest, regardless of whether they are in school. This type of loan can be more expensive for the borrower because the interest continues to accrue while the borrower is in school, which can increase the overall cost of the loan.
Default
Default on a loan refers to a failure to repay a loan according to the terms agreed upon in the promissory note. This can have severe consequences for the borrower, including damage to credit score, wage garnishment, and legal action. It's essential to stay in contact with the lender and explore options, such as loan modification or forbearance if the borrower cannot make payments.
