2009-10
Compendium

AN OVERVIEW OF LOAN PROCESSING AND TERMINOLOGY

AN OVERVIEW OF LOAN PROCESSING AND TERMINOLOGY Loans are a major source of funds for students and are often a key aid in making it possible for students to afford college. However, they create significant financial obligations for students, and it is important that students understand how they work. At the time a student receives a loan he or she is told the interest rate for the loan. The interest rate is essentially the "rent" the student will have to pay while having the loan. The higher the interest rate, the more the student will have to pay to have the loan. Guarantee or insurance fees and an origination fee often are added to the loan amount. These fees are charged to cover the costs of administering the loan program and guaranteeing or insuring the loan. Once the student drops below half-time enrollment or graduates, the student borrower is usually given a time to get settled. During this grace period (usually six months) the student is notified of the number of payments he/she will have to make, when payments are to begin, and the day of the month when payments are due. At the end of the grace period the student begins repaying the loan. Monthly payments are usually expected, with each payment made up of interest and principal (the amount borrowed). If payments are late, a late charge is assessed against the account. Both good and bad payment histories are reported to national credit bureaus; it is, therefore, important to the student's credit rating that he/she make payments on time. Most loans have specific periods of time in which to complete repayment (usually 10 years). The minimum monthly payment is usually $50; however, a larger amount may be required to retire the loan in the maximum time allowed for repayment.

If you take out a loan, be sure you understand how much you will be expected to pay for interest, guarantee and origination fees. Find out the repayment period and how long a grace period you will have before you begin making payments. Know what you are getting into!