What happens to the interest on my federal loans while I’m in school?

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.

Written by Josh Keen, Office of Student Financial Aid

What information should I consider before borrowing a student loan?

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.

Written by Josh Keen, Office of Student Financial Aid

Spotlight on Library Resources: Borrow

Understanding the Mathematics of Personal Finance [electronic resource] : an Introduction to Financial Literacy by Lawrence N. Dworsky

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 individualSo 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.

Written by Heidi Johnson, University of Illinois Library

How can I build credit without a credit card?

A great way to build credit without using a credit card is by taking out different types of loans. Now, we’re not saying you should take out a car or student loan, but if you have them already, that can work in your favor. Making those car and student loan payments on time helps build your credit history and shows that you not only are reliable, but you can use different types of loans for different situations. Also, signing up for utilities in your name helps build your credit. While it won’t establish a credit score, it can help first-time borrowers because it shows a history of responsible financial transactions.

If you’re still curious how to obtain credit without having it, here are two resources that can help guide you in the right direction: “Build Credit – Learn How to Establish a Solid Credit History” and “How to Establish Credit.”

Written by Alex Ziskind, University of Illinois USFSCO Student Money Management Center

What do I need to know about the borrowing process?

Many students and families rely on borrowing to finance their education and Federal student loans are often the primary source of these funds.  The Office of Student Financial Aid (OSFA) encourages students and families only to borrow when it is a necessity, rather than borrowing as a convenient way to finance their educational expenses.

Once a student and family make the decision to finance their educational expenses through borrowing, it is important they make informed and educated decisions about the type of loan(s) to borrow and the amount of borrowing required to pay their educational costs.  Factors that should be considered and discussed throughout this process include: understanding what is means to be a responsible borrower, understanding the types of loans available and the application process for each, and understanding the repayment requirements and options for any loans borrowed.