All federal student loans have a variable or fixed interest rate that is set by Congress. The interest rate will vary depending on the type of loan you borrow and when the loan disburses. In most cases, if you have borrowed a loan since 2007, your loan will have a fixed interest rate. This means the interest rate will remain the same for the life of the loan or until it is completely repaid.
The amount of interest that accrues (accumulates) on your loan from month to month is determined by a simple daily interest formula. This formula consists of multiplying your loan balance by the number of days since the last payment times the interest rate factor. The interest rate factor is determined by dividing your loan’s interest rate by the number of days in the year. (Federal Student Aid)
Simple daily interest formula:
Outstanding principal balance
X number of days since last payment X interest rate factor
= interest amount
Interest will accrue while you are enrolled in school. However, if you have a Federal Direct Subsidized Loan, the government will pay the interest that accrues while you are in school as long as you are enrolled at least half-time.
If you borrow a Federal Direct Unsubsidized Loan or Federal Direct Grad PLUS Loan you will be responsible for paying the interest that accrues while you are enrolled in school. Students enrolled half-time or more do have the right to receive an in-school deferment from their loan servicer. Students are still responsible for repaying the interest that accrues, but the payments are not due during the deferment period. Interest that accrues during a student’s deferment will capitalize (be added to principal amount borrowed). Capitalization occurs at the time you enter repayment and results in a higher amount to be repaid.
According to a 2012 Sallie Mae report, “How America Pays,” 35% of students borrowed education loans to pay for college and, although credit card ownership has decreased recently, 35% of undergraduates have a credit card. Credit is an important financial tool that students need to learn how to manage wisely. Learn how credit card debt can affect you now as well as in the future through this webinar.
Student loans are a common and convenient source of funding used by more than half of the students at the University of Illinois to help pay for their education. Many students do need to borrow and consider this a wise investment in their future. Before borrowing a student loan, consider this important information:
Borrow only what you need and can reasonably repay.
Develop a realistic budget and consider ways to lower your costs.
Research the average pay of your chosen field to know if your projected earnings will be enough to repay your student loans.
Keep track of your loan debt (principal and any accrued interest) so you will know the amount you will have to repay.
Know that repaying your student loan on time can help establish and maintain an excellent credit history.
Be aware that student loans are in your name and affect your credit history, so you should know and understand the obligations.
Unlike other forms of consumer debt, student loans cannot be discharged through bankruptcy except under extraordinary circumstances.
If you fail to make a payment on your student loan for an extended period, your loans may be placed into default.
A default on a federal student loan will require payment of additional costs, including collection costs, attorney’s fees, court costs, and additional interest. These costs may substantially increase the amount owed on your student loan.
No statutes of limitation apply to the collection of federal student loan debt. This means that your student loan debt may be collected many years, or decades, into the future.
The IRS may seize your tax refunds to repay a defaulted federal student loan.
Your future wages may be garnished to repay a defaulted federal student loan.
Your Social Security benefits may be garnished to repay a defaulted federal student loan.
Any disability benefits you receive may be garnished to repay a defaulted federal student loan.
A default on a federal student loan may result in the denial or revocation of a professional license, such as a license to practice medicine or law.
Undergraduate and graduate students that borrow Federal Direct Student Loans (subsidized and/or unsubsidized) need to be aware there are maximum allowable loan limits. There is an annual maximum loan limit which restricts the total amount a student can borrow for an academic year (fall, spring, and summer). Also, there are aggregate maximum loan limits which restrict the amount a student can borrow over their college career.
Are you easily overwhelmed by numbers and interest rate calculations? Do you tend to avoid careful planning and decision-making when it comes to your personal finances because you simply have trouble understanding these calculations? If yes, then this is the guide for you!
Understanding the Mathematics of Personal Finance is a highly useful resource for the day-to-day management of personal finances. Even before introducing any of the contexts in which math is used in personal finance, the resource has a primer on the mathematics that serves as the basis for personal finance calculations.
At its root, this book is all about loan calculations, but the author, Lawrence N. Dworsky, has a broader definition of a loan. A loan is not just when an individual borrows money from a bank. A loan can also be an investment, but in that case another party is borrowing money from the individual. So this resource is useful not only for borrowing but also for investing.
Understanding the Mathematics of Personal Finance will equip you with the basic math skills for personal finance that you need to make informed decisions before you borrow money and as you pay it back. Dworsky is clear that this resource does not contain strategies for borrowing or investing. Instead, it gives you the ability to decide for yourself what decisions would be best, solely on the basis of numbers.
Note: This ebook can only be accessed on campus or off campus with your University of Illinois at Urbana-Champaign NetID. If you do not have access to this ebook, please request a print copy through your local public library.