As they progress through college, it is vital for students to understand the importance of the following student loan terms so they are better prepared once they graduate:
- Capitalized interest: unpaid interest that is added to the principal amount of the loan
- Subsidized student loans: the U.S. government pays interest on the loan while the borrower is in school
- Unsubsidized student loans: the borrower is responsible for paying the accrued interest during all periods of the loan, and any interest that is unpaid while the borrower in is in deferment or forbearance will become capitalized interest
- Private student loans: offered by financial institutions such as banks; borrowers may need a cosigner of the loan, and paid interest may not be tax deductible
- Federal student loans: backed by the U.S. federal government; borrowers often won’t need a cosigner, and paid interest on the loans is often tax deductible
- Deferred payment (deferment or forbearance): the temporary postponement of making student loan payments, or a temporary reduction in the amount paid
Another key area to know about student loans is what to do if students take out student loans and are entitled to receiving refund checks. It is vital for students to know the choices they have in terms of accepting these refund checks and also how to best use them.
Often times, students receive these refund checks while having deferred payments on outstanding loans, and they do not apply those funds towards the loans. While it can be tempting for the student to keep those refund checks as spending money, they are much better off to apply them to the cost of their loan, which is currently waiting in deferment and collecting interest while they are in school, if the loans are unsubsidized.
There are many details that go into the borrowing and repayment of student loans, so the sooner the student understands these details, the more diligent they will be in repaying them.
