Know Your Loan Terms and Fine Print

The second phase of getting your education paid for is deciding what kind of institution to borrow from. For the vast majority of adults, there are only two choices, federal and private lenders. The sections below explain some of the key differences between government and private lenders, as well as terminology that is sure to appear in any application you fill out.

Getting a Private Student Loan

Don't forget that all student loans are not the same. The main differences relate to whether the loan is a federal or private one. Of course, there are pros and cons of each kind. However, for borrowers who don't want to deal with egregiously long applications, want to shop around for competing offers, and like the ability to negotiate terms with a lender, private lenders are the way to go. Fortunately, just about anyone over the age of 18 can apply for and get an education loan from a private lender to cover all the expenses associated with advanced schooling, like tuition, books, activity fees, board, room, and similar costs.

Accrued Interest and Capitalization

Read documents carefully to discover how the lender treats built-up (accrued) interest. Some contracts capitalize this amount while others do not. Here's an example. If a bank lends you $1,000 and charges 5 percent annual interest, you would owe $1,050 at the end of year one, assuming you made no payments. After that, if the institution charges interest on the interest, you'll end up paying that 5 percent on a new, higher amount. This is a case of capitalization. Check to see which method your lender uses as you study the documents before signing.

Statement of Disclosure

This important piece of paper lays out all the details of the agreement, like the total amount you're borrowing, how often you have to make payments, what the rate is, whether there are any penalties, and more. Usually appearing as a summary page at the beginning or end of the document package, the statement of disclosure is the short version of all the pertinent numbers within the contract you are signing.

Fixed vs Variable Rate

Suppose you are required to repay not just the principal of the loan but also five percent on the remaining balance. That's an example of a fixed-rate agreement. When lenders use variable rates, they often tie the rate you pay to whatever the current prime rate is. There are advantages and disadvantages to each method. Fixed rates give you the peace of mind of knowing your payment amount doesn't ever change. But, if prevailing prime rates go down, you could still be stuck with a higher-than-market rate. Likewise, variable-rate agreements rise and fall with the state of the economy. When the prime goes down, so does your rate. But if it goes up, you are on the hook for a larger monthly obligation.

Grace Periods

Somewhere in the fine print of your education loan contract there might be a clause about grace periods. These are specific periods during which you do not have to make any payments on the obligation. Typically, grace periods run from graduation until six or more months after. The point of allowing grace is to give students a chance to search for jobs and to catch up on their other financial obligations before monthly remittances begin. Keep in mind that most contracts do not include grace, but repayment often does not begin until you graduate. That way, even if you receive a disbursement to cover school costs when classes begin, there's no need to repay until schooling is complete.

Credit Reporting

Check the fine print on your documents to see how the financial institution reports your repayment. Some report all your activity, good and bad, to the three major credit bureaus. Others only report to one or two of the bureaus. If you intend to stay on top of your credit health, it's wise get three bureau reporting.