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Ever taken out or refinanced your student loans? You probably know the interest rate of your loan, and may have seen the letters APR on your statement. (APR stands for Annual Percentage Rate.) Understanding the difference between the interest rate and the APR is important. While they both measure the cost of borrowing money, they are not the same. Knowing the difference could save you thousands of dollars on your student loans.

What is the difference between the student loan interest rate and the APR?

The interest rate on a student loan is the cost to borrow money. It is shown as a percentage. Your interest rate does not reflect any fees or other charges you may pay for the loan. The APR goes a step further. It takes the interest rate on a student loan and adds in any upfront costs, such as an origination fee. The APR is also a percentage, but it measures the total cost of borrowing money on an annual basis.

By law, private student loan issuers must show customers the APR. The law requires this to facilitate a clear understanding of the actual interest rates and fees applicable to their agreements. In the U.S., the calculation and disclosure of APR is governed by the Truth in Lending Act.

Tip: While U-fi From Nelnet and many private student loan lenders do not charge an origination fee, some lenders do. Be sure to carefully read the loan terms before applying for and accepting a loan.

Why is it important to know the APR if I know the student loan interest rate?

As mentioned above, the APR gives a more complete picture of the cost of borrowing. For student loans and student loan refinancing, if the lender doesn’t charge an origination fee and you immediately begin making full principal and interest payments, the interest rate and the APR will likely be the same. However, if the lender charges an origination fee or you defer making principal and/or interest payments while you are in school, your APR will not likely be the same as your interest rate. By looking at both the interest rate and the APR, you will be able to get a clearer picture of your expected monthly payment and the total cost of the loan.

Does the interest rate and APR tell the complete story?

Interest rates and the APRs are useful tools to help understand the cost of borrowing and to compare different loans. But, they don’t always tell the complete story. For instance, federal Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans come with an origination fee, but the fee is deducted from the loan disbursements, so the origination fee is not included in the APR. Thus, if you took out a $10,000 federal Direct PLUS Loan with its 4.272% origination fee, you would only receive $9,572.80, but you would have to pay back the entire $10,000, plus any accrued interest on the loan.

Also, the stated APR may or may not include any borrower benefits associated with the loan, such as an interest rate reduction for auto debit payments or cash back rewards for good grades. Some federal student loans also come with loan forgiveness programs, so be sure to take all these into account when comparing loan offers.

Tip: The interest rate and the APR for a variable rate student loan reflects the interest rate and costs at the time you take out the loan. If interest rates change, the APR changes as well.

Knowing the difference between APR and interest rate helps you make an informed decision when taking out student loans.

You’ve probably heard the term cosigner. But, do you know what it means, how it can help you, or what qualities make a good one? If you find your federal funds aren’t enough to cover the cost of college, consider applying for private student loans. Applying with a cosigner can help you qualify for a private student loan. It can be difficult for student borrowers to meet the criteria and income requirements by themselves. Learn if a cosigner is right for you.

What is a cosigner?

A cosigner is a person who signs for a loan with a borrower. If the borrower misses payments or defaults on the loan, the cosigner takes responsibility for payments and the remaining balance. Since both the borrower and cosigner have equal obligations, missed payments and default affect both their credit.

How does having a cosigner help me?

Including a cosigner on a loan decreases the risk for the lender. That’s because the lender has another person obligated to repay the loan if the borrower defaults. Cosigners allow the lender to take on less risk. Less risk increases the borrower’s chances of getting approved for the loan. It may also lead to better loan terms. These include lower interest rate or shorter repayment length. Both could save considerable money over the life of the loan.

Even if you qualify for a loan without a cosigner, the loan terms are generally not as favorable. However, wanting a cosigner to improve your loan terms and needing one for approval are two different circumstances. You may need a cosigner if you have no income or too little income, have no established credit or poor credit, your debt-to-income ratio is too high, or if you are either unemployed or recently changed jobs and don’t have an employment history. If any of these scenarios apply to you, you should consider applying with a cosigner to qualify for the loan. Applying with a cosigner gives you time to fix any of the above issues. It can also mean you can take out future loans on your own.

Who should I ask to cosign?

The most difficult part of choosing a cosigner is finding someone who is willing to sign on a loan with you and also has strong credit. Typically borrowers will turn to spouses, parents, or close friends to cosign. No matter who you choose, be sure your cosigner is financially stable. Other traits to look for in a credit-worthy cosigner include having a good job with a solid employment history and/or owning a home or other assets.

Asking someone to cosign on a loan with you is a big commitment, so make sure you are prepared. Tell your potential cosigner the reason you are asking them to cosign, your intentions to pay the loan back, and communicate to them that you can afford the payments. You can also ask your lender if there is a cosigner release option. Some loans will allow you to request that your cosigner be removed from the loan after a period of time if you meet certain requirements. Being prepared to answer any questions your potential cosigner has will show that you are serious about taking on the financial responsibilities of a loan.

Cosigning is a big commitment for both the borrower and the cosigner and should not be taken lightly. Make sure both you and your cosigner understand all terms and are clear on the responsibilities of the loan prior to signing.

Financial aid is awarded in many forms, and as a student, it is important to know all of your options before deciding which awards to accept. You’ll want to compare the aid and calculate the remaining costs of all the schools you are considering. Eligible students may receive an award letter or a financial aid package.

The Financial Aid Process

Submitting your Free Application for Federal Student Aid (FAFSA) is an important first step to ensure your financial aid eligibility is considered. Your program must first accept you for admission, you must complete your FAFSA, and submit any other information your school requires. To be in the best position, complete all steps on or before each school’s published deadlines. When schools receive your FAFSA information, they calculate your family’s Estimated Financial Contribution (EFC). Your family’s actual financial contribution and the composition of your award letter may differ among schools. Your EFC is deducted from the total Cost of Attendance (COA) to determine your financial need. If you are eligible for financial aid, your award letter will contain all of the aid programs you are eligible to receive, the steps you need to take, and the deadlines for responding to the award letter.

Note: Although you will see your EFC on the Student Aid Report you received after filing the FAFSA, it is probably not the amount you and your family will actually pay for college. For more information, review the article I Submitted My FAFSA – Is the Expected Family Contribution What I Have to Pay for College? When you review your award letter, read all information, understand each program, and know your obligations to ensure you receive the funds. You will need to select the awards you would like to accept and respond to your award letter by the date indicated.

Types of Financial Aid

There are several different types of financial aid including grants, scholarships, federal work-study, and loans. The terms of each type of aid vary, so it is important to understand the differences.

Grants are typically based on financial need and do not need to be repaid. They may include funds from federal, state, and institutional sources. Programs apply grants to your college bill.

Scholarships are based on academics or other performance criteria, financial need, or a combination of both and do not have to be repaid. Scholarships usually come from institutional or private sources who apply funds to your college bill.

Federal work-study may be listed on your award letter, but in order to receive the funds, you must obtain a qualifying job and work to earn this type of financial aid from federal and institutional sources. Your financial aid office will post eligible jobs that are open to qualifying students. Once you secure a job, you’ll receive paychecks throughout the year for your hours worked. Work study does not apply funds to your college bill.

Loans are funds you borrow now and pay back with interest after you finish or leave school. They may come from federal, institutional, or private sources. For most loans, you will be required to take additional steps to secure the funds. If you receive a loan, it is applied to your bill. Many loans also charge fees, which are deducted from your loan amount. Be sure to read all of the loan terms before you borrow.

Determining the Amount You Owe After Financial Aid

Remember, colleges bill you for some costs prior to the start of each semester. The bill typically includes tuition and fees plus room and board charges if you live on campus. You will also have additional expenses such as books, transportation, and personal expenses that will not be included in your bill. Schools factor in all of this criteria when determining your overall cost of education. Your award letter outlines the total for each type of expense.

To determine the amount you will pay at each school, first deduct your grants and scholarships, then loans (minus fees) from your estimated college bill. Your school evenly divides and credits most aid to each semester’s bill.

You will also need to consider the cost of books and supplies at the beginning each semester, and any personal and transportation expenses you may have throughout each semester. If you have financial aid left after your school applies funds to your bill, you can use it to help with these expenses. Obtaining a work-study job can also help with personal expenses. As a general rule, it’s best to have additional funds set aside to help with personal expenses as well.

To continue to receive aid, you will need to make satisfactory academic progress toward your degree. Scholarships may require that you achieve a certain grade point average or meet other performance criteria. Programs also include renewal information with your award letter.

Additional Funds to Help Cover College Costs

In addition to the financial aid listed above, there are alternate sources that can help cover the cost of college.

Private Scholarships

There are a number of private scholarships available, which you can search for with Peterson’s College Scholarship Search. Your guidance counselor can also be a great resource for private scholarship information. Private scholarships can help offset the amount you need to borrow.

Direct PLUS Loans

These are federal loans that some schools may include in an award letter. Direct PLUS Loans are subject to certain eligibility requirements. Typically graduate or professional degree students or parents of a dependent undergraduate student are eligible to receive these loans.

Private Loans

As an alternative, private loans can also assist with covering college expenses. Private student loans, sometimes known as alternative loans, are made by private lenders such as banks, credit unions, and financial institutions. Private student loans are based on credit and are most often used to fill the gap between the cost of attending college and family savings, grants, scholarships, and federal student loans.

Paying for school can feel like an overwhelming process. It’s crucial to meet all of your deadlines to be considered for eligibility. Mapping out your deadlines on a calendar can help keep these details organized. Make sure you consult the available resources and fully understand each step of the process to get the most out of financial aid.

Considering paying off your student loan debt with your tax return or just a lump sum of money? There can be more to larger payments than meets the eye. Follow these steps to learn how to make the most of your lump sum payment.

1. Make a List

Knowing which loans you want to pay off first will help you get the most bang for your buck. Make a list of all of your federal and private student loans, the balances, and the interest rates. Then, based on your goals, weigh your options. You could put your lump sum payment toward your highest interest rate loans, or pay off your low-balance loans first. Paying off your highest interest rate loans reduces the amount of interest you pay. It also saves you money over the life of the loan. Paying off your lowest balance loans first could save you money on your monthly payment. Paying off your lower-balance loans allows you to put money saved from a lower payment toward your other student loans. This can help you to pay them off faster.

2. Talk to Your Loan Servicer

Check to make sure your loan servicer knows how you want your payments applied to your student loans. If you pay above the minimum payment and don’t specify how you want payments applied, your loan servicer decides for you.

Below is a sample letter put together by the Consumer Financial Protection Bureau (CFPB) that you can send to your loan servicer to ensure payments above your minimum monthly payment amount are being applied to the correct loan(s). For some loan servicers, this can be done online.

I am writing to provide you instructions on how to apply excess payments greater than the minimum amount due. Please apply payments as follows:

  1. After applying the minimum amount due for each loan, apply any additional amount to the loan accruing the highest interest rate.
  2. If there are multiple loans with the same interest rate, please apply the additional amount to the loan with the lowest outstanding principal balance.
  3. If any additional amount above the minimum amount due ends up paying off an individual loan, please then apply any remaining part of my payment to the loan with the next highest interest rate.

It is possible that I may find an option to refinance my loans to a lower rate with another lender. If this lender or any third party makes payments to my account on my behalf, use the instructions outlined above.

Retain these instructions. Please apply these instructions to all future overpayments. Please confirm these payments will be processed as specified. Otherwise, please provide an explanation as to why you are unable to follow these instructions.

3. Things to Keep In Mind

There are a few other things to be mindful of once you’ve decided where to apply your lump sum payment.

  1. Follow up with your loan servicer. Call or check your accounts online to make sure your payment was applied as specified.
  2. Making a payment larger than your minimum payment amount can sometimes advance your due date. This means another payment on your student loans won’t be due until your minimum payments catch up to your lump sum payment. While it can be nice to skip a few months of student loan payments, your loans still accrue interest and won’t save you any money. Even if your due date advances, continue to make your monthly payments to save yourself money in the long run.
  3. You can also save money on your student loans by refinancing. Refinancing allows you to combine both your federal and private student loans into a new loan with a new repayment term and interest rate, which can often save money over the life of the loan, or help lower your monthly payment.

Paying off your student loans is a great accomplishment. As you begin to make decisions around your personal finances, make sure to keep these tips in mind so that you can make the best choices for your financial future.