2. Origination fees matter
While most people look primarily at the interest rate as the cost of borrowing funds, origination fees are also important.
Federal Direct PLUS student loans add a one-time fee of 4.248 percent (between October 2018-October 2019). The fee will be deducted upfront from your loan disbursement, so the amount you receive is less than the amount you borrowed. However, you have to pay back the full amount you borrowed, including the fee that was deducted.*
Private student loans generally don’t have origination fees. This may be a distinction to consider when applying for loans.
3. Interest charges can be added to your balance via capitalization
Accrued interest is considered part of your loan balance. Then interest can be charged on the principal amount. The process of interest being added to your principal amount is called capitalization.
For example if $1,000 in interest accrued while you had a deferment in college, this $1,000 would be added to your balance when you go into repayment. If you were charged 3.4 percent annually on this principal amount, you’d pay $34 annually on the interest that was capitalized
4. There is an exception to when student loan interest is charged
While there are a variety of reasons for when interest isn’t charged, there is only one type of federal student loan that offers this exception: subsidized student loans.
Subsidized means the interest is paid by the government during certain time periods such as attending school at least half-time.
Understanding interest rates will help you in the long term
Interest rates aren’t just one factor involved in student loan borrowing, they also come into play with other types of lending like mortgages and car loans. Understanding the basics can help you make good borrowing decisions.