Signing your promissory note is the beginning of your journey to managing your education financing. Understanding the costs and subtle intricacies of borrowing will help you to manage your debt.
The following are some important lending terms and understanding them can help you along in your journey:
- Principal: The amount of money the lender loans to you.
- Interest: The additional amount that you pay to the lender for the privilege of using the
money they are lending you.
- Accrue: The accumulation of interest.
- Capitalization: The process of adding accrued interest to the principal amount owed.
When you borrow money from a lender, the total amount you owe is higher than the amount you receive because of the interest. For example, if you borrow $10,000 at an interest rate of 8.25 percent, your payments may look something like this:
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Loan amount:
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$10,000 |
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Interest rate:
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8.25 % |
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Repayment period:
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10 years |
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Number of payments:
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120 |
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Each payment:
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$122.65 |
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Total amount repaid:
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$14,718 |
To learn more how to better estimate your budget and manage your student loans visit Chela Education Financing's website for these helpful calculators:
Loan repayment
Discount savings
After graduation
Loan consolidation
Cost-of-living
Family contribution
In-school budget
Remember loans are structured so that most of your initial payments go toward the interest you owe, rather than to repaying the principal.
For example, let's say that you have a $5,000 balance at a 17 percent interest rate. If you paid $100 a month for 36 months, your new balance should be approximately $1,400. Right? Wrong. Due to the structure of most credit-based loans, your monthly payment is applied toward the interest first. That means that out of the $3,600 you have paid, only $1,346 went toward the principal. In reality, you still owe $3,654. And if you continue paying $100 each month, it would take 71/2 years to pay off the $5,000, and you would have paid a total of $8,819.
To avoid late fees and collection costs, be sure to make loan payments as scheduled.
Note: The above section does not apply to Federal Stafford Loans
A student loan is a long-term commitment. Students should explore all of their options before taking out a student loan. Graduates who have loans to repay must include those costs in their monthly budgets.
Repaying your student loans is an opportunity to establish a solid credit record. However, the opposite is also true. Not paying your student loans back in a timely fashion, otherwise known as defaulting, will cause you to have a bad credit rating and will limit your ability to qualify for other types of credit, including a credit card, a car loan, or a home mortgage.
Keep the following in mind:
Borrow only what you need
Keep track of what you owe
Manage your money wisely
Before you borrow money for school, consider what your anticipated starting salary and living expenses will be when you graduate. Then estimate what you'll be able to afford in monthly loan payments, generally not more than 8-10% of your gross monthly salary.
"Budget" doesn't need to be a nasty word. Having a budget is simply understanding how much you're spending each month, and how much you have available. Managing a budget is a key step to good money management.
Steps to establishing a budget:
- Start by listing all of your available funds For example, savings, parents' contributions, take-home pay, and other financial assistance.
- Itemize all of your expenses, from tuition and fees to meals and entertainment.
- For a few months track every dollar you spend so you know where your money is going..
- Add up everything you spend and put that amount in one column on a piece of paper.
- Compare that amount to how much you have available.
- If you find that what you spend exceeds your available funds, it's time to re-evaluate. You either need to increase your income or decrease your spending, or maybe a little bit of both.
- Always know where you stand.
In the end, your college education is worth the investment. Recent studies show that college graduates make $1 million more during their lifetime than non-college graduates. As long as you spend responsibly, work hard, and remember that financing your education is a commitment that will eventually pay off, you'll be a millionaire before you know it - loan debt or not!
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