Your student loan application may be the first contract you sign. And that's exactly what it is — a contract. It's a legal agreement between you and your lender. As with most contracts, there will be legal language that you might not have heard before. Here's a rundown of items you will need to understand:
- Promissory Note
- Repayment Options
- Disclosure Statement
- Accrued Interest
- Capitalized Interest
- Late Charge
- Change of Status
The Promissory Note ("Prom Note") contains information covering the terms of your loan. The Prom Note is what you sign, and signing it means that you agree to everything stated in it (The terms and conditions of the loan). Read it carefully.
When you borrow money you have a legal obligation to repay it. Most lenders, offer more than one way to repay the loan. For example, recognizing when you leave school your income should grow with time and experience, your lender may let you schedule smaller payments at first and then increase the monthly payment amounts as time passes. Repayment options may vary by lender and loan type.
The repayment method selected impacts the total amount you repay, and that amount is outlined in your Loan Approval Disclosure and Final Disclosure.
As you know, you will repay the amount you borrowed with interest. Generally, the interest rate and how it is applied to your loan, which results in the accrued interest, will be defined in your Promissory Note. For many loans, interest is computed on a daily simple basis, which means you may have to pay more interest if your payment is late.
Use College Answer's Accrued Interest Calculator.
The bottom line is you repay the interest on your loan before you repay the principal. If you find that you can't make payments for reasons such as unemployment, you may qualify to suspend your payments. During that time, though, interest is still accruing. Private student loans do not have interest subsidies, so any interest that accrues will capitalize. "Capitalized" means the interest is added to the principal balance and interest accrues on that capitalized interest just like it does on principal.
If you have a subsidized loan, the federal government may cover the accrued interest, depending on your reason for not paying. If you don't qualify for this interest subsidy, you have two options: you can make interest-only payments; or have the interest added to the outstanding loan principal (capitalized) when you resume repayments.
If you do not repay your loan on time at the amount you've agreed to, you may receive calls and letters from your lender or servicer. Talk to the people who service your loan(s) — they may be able to help you if you're having financial troubles.
If you fail to pay all or part of a required installment payment when due, a late charge may be assessed.
Change of Status
Notify your lender or servicer when you change your name, mailing address, e-mail address, or phone number — or if you leave school or drop below half-time status. Your signature on the promissory note says that you've agreed to this borrower responsibility.
Most importantly don't let this happen to you. The terms of your loan hold you to repaying the loan in-full and on-time. There are serious consequences for failing to do either.
Not paying (or defaulting) on your loan can have negative impact on your ability to purchase a car or home or even obtain a credit card.
If you find you are unable to pay, work with your lender to learn your options.