Understanding Student Loan Interest Rates

By Francine Fluetsch on July 11, 2015

So what’s the deal with student loans? They reel you in, allow you to pay for school, and tell you they will give you a grace period after you graduate. But what do student loans really mean? Interest. Lots and lots of interest.

image via studentloanhelper.org

Since you are usually borrowing a good chunk of money when you take out a student loan, it will take you a while to pay it off, and in that time, interest will slowly start to build up. The longer you take to pay back your loan, the more interest your loan will acquire, meaning you could end up paying back more than double what you initially borrowed.

The trouble is, many students aren’t thinking about this when they take out the money, because they need it to pay for school and the loaners make it seem like you will have tons of time to pay it off. They usually offer you payment plans after you graduate, ranging from small amounts due every month, to much bigger ones.

While paying the smallest amount possible looks appealing at the time, you will really regret it later. You want to pick a plan that will help you get rid of the debt as fast as possible, without starving yourself or putting yourself on the street. It will be tough in the beginning, but the sooner you pay it back, the less you will have to pay. Other debts can be wiped clean, but student loans stick with you until you pay back every penny, and then some.

Think of it like paying your credit card. Everyone would love to simply pay the measly minimum of $25, but the more you do this, the more you owe the next time, plus the interest, so you are slowly digging yourself into a hole that you may not get out of. If you borrow $10,000 to pay for school for example, you don’t want to give the bank $30,000 when you finally pay it all off. It puts a burden on you that never seems to leave you alone.

A problem that many students face is not being able to make much progress on paying off their loans when they graduate. Unless you hit a stroke of luck, your first job is going to be at the bottom of the totem pole until you can prove your worth, meaning your finances will be heading more towards living expenses than anything else. This will make it a challenge to make a substantial dent in your loan right off the bat like you would like, and if it continues on like this for a few years, it will become very frustrating.

Interest rates on student loans also tend to be very high, and can fluctuate depending on a number of factors. Not all interest rates are fixed, so if you take a while to pay it back, your interest rate could unfortunately be increasing. This will make the loan even harder to pay back, since the amount will just keep going up.

So what should you do?

As depressing as this topic is, this article is here to show you the hard facts of student loans, and how you should avoid them at all costs. If you must take them out, which many of us have to do, try your best to be smart about it.

Get a job during school and put a set amount aside from each paycheck that will go directly towards your loans. You can set up a savings account that won’t let you access it until a certain date, to help refrain from dipping into that money. This will help you get ahead and start paying off the loans when they kick in.

To avoid taking out too much money, you can also apply for a work-study job that will go directly towards paying off your tuition. It may not seem like much, but if you can keep that going for all 4 years, it will really make a difference.

You can look into getting a job as an R.A., since they get their housing and meal plan paid for as compensation for the job. This will definitely lower your expenses, and if you have to take out a loan, will make it much smaller since most of your college expenses will be covered.

You can also try loaning money from family, since they won’t be asking for interest when you pay it back (if they are nice). Money can always be a delicate topic, so I understand if you don’t want to go this route, but it can always be an option.

Overall, make sure to research the loan before you take it to see what their specifics are concerning the amount of interest and so on, and also make sure you have a plan of some sort of how you are going to pay it off. Don’t mess with loans unless absolutely necessary.

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