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Understanding Loans: Reduce Loan Costs

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Taking out a loan, whether a federal or private student loan, can seem like an easy way to pay any remaining expenses for college after you use all available scholarships and grants. But unlike those types of free money, loans are a type of financial aid that must be repaid with interest. And what may seem easy now could have a serious impact on your financial future.

If you borrow money for college, it's important to do what you can to limit or reduce the amount you borrow.

Student Loan Game Plan

A good way to learn about reducing your borrowing costs is to complete Student Loan Game Plan. Note: All ISL Education Lending private loan applicants must complete Student Loan Game Plan.

Limit Your Borrowing

The easiest way to reduce any loan costs is by eliminating loans completely or by borrowing a minimal amount. You can reduce your need for student loans by:

  • Seeking out and using grants, scholarships and other sources of aid first.
  • Reducing expenses.
  • Working on or off-campus to help pay for college and living costs.

Reduce Expenses

Little changes can add up over time when you're trying to cut back on expenses. For example, you can:

  • Rent or buy used books for classes.
  • Drink tap water instead of buying bottled water.
  • Make your own cup of coffee instead of purchasing to-go coffee.
  • Go to a matinee instead of an evening movie.
  • Take advantage of free or less expensive entertainment events on campus.
  • Walk or bike to classes and leave the car at home.

Pay Interest

If you do borrow money, you can prevent that loan amount from increasing by paying all accruing interest while you're in school. Making monthly payments of interest prevents interest from capitalizing, or being added to the principal balance of your loan. This keeps your loan balance from increasing while you're in school.

Capitalization is a process where unpaid interest is added to the principal balance of your loan, increasing the principal balance. Each time interest is capitalized, the principal balance increases. Because the principal balance is larger, more interest then accrues each day. Over time, this could make your loan balance more than the amount you originally borrowed.

If you choose to make interest payments while you're in school and pay all the interest before it capitalizes, your loan amount after college will equal the amount you took out before or during college. If you defer repayment and do not pay interest during college, your loan amount could increase significantly before you graduate and then you will be paying interest on both your original loan amount and all the interest that has capitalized. That means you will likely end up paying more over the life of the loan.

Why did the loan amount increase from what was originally borrowed?

Most student loans do not require payments while you are enrolled in school at least half time and for a short period of time after you leave school or drop below half-time enrollment. However, interest continues to accrue daily on student loans during this in-school deferment and subsequent grace or separation period. If you do not make any payments to cover accruing interest during these periods, it may be capitalized, or added to your principal balance, when the deferment and grace or separation periods end.

As you continue in your repayment period, if your payments are not enough to cover accruing interest, that interest is also capitalized at certain times according to the terms you agreed to when you took out the loan. Outstanding (unpaid accrued) interest may capitalize at certain intervals, such as annually or quarterly, on private student loans. It may also capitalize at the end of any assistance period, such as deferment or forbearance, on private and federal loans.

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