Interest Rates And Fees
Interest rates can be defined as the amount an institution will pay for the holding of money from a person, family, fund or corporation. Conversely, interest rates can be defined as the money these entities mentioned above owe their institution, this usually being a local or international bank. The purpose of interest rates is manifold, but generally, it can best be summarized as a tool to motivate repayment and avoid exorbitant loans from borrowers. Interest rates will differ greatly by the type of loan, and when it comes to student rates, the loans often demand lower interest rate than usual, as institutions and their regulators understand the difficult of immediate repayment. Student loans are administered and regulated by the federal government. Within this student loan category, there are several types of rates offered to accommodate the potential living or employment situations of recent graduates.
How Is Interest Calculated?
To keep interest rates from student loans from becoming too complicated, there is a specific formula that is followed to guarantee that they are evenly doled out. The interest rate will work as such: A certain percentage (rate) of your outstanding balance will be multiplied by the number of days since you last paid, then that will be multiplied by the interest rate factor. Your interest rate factor is determined by your interest rate percentage divided by the amount of days in that particular year
In the United States, interest rates are set by the Federal Reserve, who regulate and determine the amount of money that is either dispensed into the economy or withheld. This ensures that prices do not go up nor down too quickly. As for student loans, these are regulated by the Department of Education, and private loans are largely overseen by the Federal Trade Commission. They closely monitor the interest rates so that students are neither to indebted nor using the loans too freely. The Federal Trade Commission will also closely monitor private lenders to ensure they are not using corrupt practices to gouge money out of its borrowers.
Student loan rates are managed and administered by the government, and the types mentioned below cater to the particular needs of particular students. The interest rates vary depending on the necessity of the lender to use the loan. Here are the four main types currently offered:
- Direct Subsidized Loans: These loans cater in particular to undergraduate students in need to subsidies to pay for their education. Fixed at 3.4%, it is the lowest because it recognizes that many are enrolled to gain an upper hand in the employment market as soon as they can
- Direct Unsubsidized Loans: Unlike subsidized loans, these are offered to anybody, but since they are set at 6.8%, the loan is more difficult to repay. The extra rate assumes that some of the student’s education is paid by parents or guardians
- Direct PLUS Loans: Catering to older students, this loan is one of the highest federal rates, but those who use this are either parents, graduate students or professional students seeking a grant or doctorate. The rate is fixed at 7.9%
- Perkins Loans: The Perkins loans are offered by several hundred institutions in the United States, but unlike subsidized loans, the pool of money that is capable of being loaned is managed by the University
One factor that students need to consider about their loans is the possibility of fees being attached. Federal loans will by necessity deduct a percentage of money you receive. 1% will be charged on Direct Subsidized loans and Direct Unsubsidized Loans, while a 4% charge will be placed on PLUS loans. As for Perkins loans, they will not require you to pay extra.