Top Loan Terms Every Parent Should Know
If your child is planning on studying in the U.S. (or in Canada), they might be searching for international student loans to cover their cost of attendance. Navigating the borrowing process can be confusing, especially since student loans seem to have a language of their own. Learning terms like annual percentage rate (APR), principal balance, and capitalization can help you and your child make informed financial decisions.
That’s why we’ve put together a list of the most important loan terms every parent of a current or future international student should know. Use this glossary to improve your understanding of student loans and help your child borrow the funds they need for college abroad.
Interest
Interest is the most significant cost of borrowing a loan. It’s calculated as a percentage of your outstanding loan amount and is generally charged monthly throughout the life of a private student loan. Let’s say, for example, that your child borrows a US$25,000 loan at a 13.99% interest rate. Over a 10-year repayment term, you would pay a total of $46,562; the US$25,000 originally borrowed along with US$21,562 in interest.
Annual percentage rate (APR)
APR is similar to interest rate, but it includes both interest charges and fees. As a result, it is considered to be the true annualized cost of the loan. Because this rate includes both interest and applicable fees, a loan’s APR will be higher than its interest rate. If you’re comparing several loan offers from multiple lenders, the loan with the lowest APR will have the lowest cost of borrowing.
Origination fee
Some lenders charge a one-time origination fee, which may be a flat fee or a percentage of your loan amount. This fee covers the work that a lender puts into processing your application and disbursing your loan. It may also be referred to as an administrative or processing fee. Some lenders require you to pay this amount upfront, others allow you to finance this amount with the amount you are borrowing for school.
Principal balance
The principal balance is the original amount an individual borrows, so this does not include interest charges. If your child borrows a US$25,000 loan, for example, the loan has a principal balance of US$25,000. When they start paying back the loan, a portion of their payment will go to interest charges and the rest will go toward paying down the principal balance.
If you financed the loan’s origination fee (see above) and that fee was 5% or $1,250, your principal balance would start at $26,250 even though $25,000 was sent to your school.
Capitalization
Capitalization refers to the addition of interest to the loan’s principal balance. There are a few times when interest may capitalize, such as when the borrower’s grace period ends (which is often at graduation or a set number of months after graduation). If the borrower doesn’t pay off the interest that accrued while they were in school, these charges may be added to the principal balance. Future principal and interest payments will factor in this higher balance in determining your monthly payment – which is called “reamortizing” or “recasting” payments.
Repayment term
A loan’s repayment term is the amount of time a borrower has to pay back the loan. The loan may have three repayment periods:
- In-school repayment: This is the time when the borrower is attending school. Many lenders let you postpone payments during this time, or pay a small amount (like interest only), but some will require the full loan payments.
- Grace period after graduation: Some lenders offer a grace period after the student graduates, typically six months, during which no loan payments, or smaller (interest only) payments are due. Students can use this time to transition away from college and look for a job.
- Post-school repayment: After the grace period ends, the loan enters active repayment. The borrower must make full principal and interest payments on the loans. A typical post-school repayment term is 10 years. On this term, a borrower makes monthly payments over a period of 10 years, after which the loan is paid off in full.
Every lender is different, and some require payments immediately after the loan is disbursed. Make sure your child understands their repayment term and when their first loan payment is due.
Cosigner
A cosigner is a parent or other individual who shares responsibility for a student loan along with the primary borrower. Some U.S. lenders require cosigners on international student loans – specifically individuals who are U.S. citizens or permanent residents. MPOWER Financing does not have this cosigner requirement, making it easier for international students to borrow loans in their own name, and in turn have financial independence.
In-school payment period
An in-school payment period refers to the time when the student is enrolled in and attending school. Some lenders require payments during this time, while others let students postpone payments while they’re in school and for six months afterward in a period of time known as the grace period.
Even if payments aren’t due during the in-school period, students can choose to make full, partial, or interest-only payments toward their loans. By making in-school payments, the borrower can cut down on interest charges and the possibility of capitalization (see above).
As mentioned, some lenders require in-school payments, while others do not. Read over the loan contract carefully to determine when payments are due.
Loan servicer
A loan servicer is a company that partners with your student loan lender to collect payments and provide customer service on your payments. The borrower pays their student loans back with the help of their loan servicer, usually by creating an online account on the servicer’s website. Your loan servicer is also your first point of contact if you want to request deferment, need a copy of your student loan statements, or have any other issues with your student loans.
If you’re interested in learning more about MPOWER Financing and the loan terms they’re able to provide your child, get further information so they can start achieving their study abroad goals.
