An Introduction to Interest Rates

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Whether you’ve already started paying off your student loans or are just thinking to the future, you probably know that the money you borrowed came with some strings. You need to pay back all the money you borrowed for school in full and on time –plus interest.

Interest is the money that the government or lending institution charges you for the privilege of using their money to pay for your education. It is calculated on the base amount you borrow or the principal and is a percentage of that principal. For example, if you borrow $10,000, at an interest rate of 5 percent, you would need to pay the lender $500 in interest. However—and here’s where it gets tricky—when you’re paying back the principal over time, the amount you owe is amortized. Amortization allows your payments to be spread out, but also means that you’ll pay more money in the long run. And at the beginning of the loan, most of your payments will go toward the interest, rather than the principal. That same $10,000 at that same 5 percent rate paid over 5 years will cost you more than $1,100 in interest.

More you should know about interest rates:

The best way to save money on your education is to explore all your options from the start. If you qualify for financial aid, you may be eligible for scholarships and grants which do not have to be paid back. This type of aid has no interest because there is no principal. If you do need student loans, the federal government generally offers the most competitive interest rates and best borrowing terms. Investigate all available resources before deciding and negotiate the best interest rates you can.

Even with a fixed rate of interest you can still reduce the amount you pay over time by paying down your principal. Whenever you are able, consider applying extra money directly to the principal of your school loan. By reducing the principal, you also reduce its interest and save yourself money!

If you have more than one student note and a good credit history, consider consolidating your loans. Choose the lender that offers the lowest interest rate and renegotiate your entire loan. By transferring your high-rate loans to low-rate loans, you can save thousands of dollars over the life of your loans.

At Charter College, we work closely with our students to help them explore all their financial aid options so they can get the education they deserve. We offer programs in business, criminal justice, health care, hospitality, information technology, paralegal studies and the trades. Learn more by visiting our website today.