Cracking the Code: What Does the Private Student Loan Fine Print Mean?
When you take on a federal student loan to pay for your schooling, the terms are consistent and everything will be spelled out neatly for you. But when it comes to private student loans, there are differences from lender to lender, from loan to loan and even borrower to borrower. Even to the same borrower, different private student loans can have different terms and conditions.
The scary thing is all of that fine print can make your head swim and you may just sign without giving it a good read. That’s never a good idea when it comes to financial contracts. Even if you’ve already signed a student loan agreement, finding out exactly what you agreed to is very important!
So below we’ve cracked the code on the terminology used in private student loan contracts in hopes it will help you dissect your document!
Annual Percentage Rate (APR) This tells you the average annual effective interest rate you’re being charged. In some cases, this will be a flat percentage that won’t vary. In other cases, if you have an interest rate based on an index or other rate, it will vary as that associated rate varies.
Index With many private loans, there is a base interest rate with a spread tacked on. For instance, it could be on a published financial rate plus a certain number of points (the spread). If your points were set at three, you would pay the base interest percentage plus three more percentage points.
Prime Rate This is the rate that banks charge their very best customers for loans. This is likely not the rate you’ll be charged for your student loan – more likely is it will serve as the index and you would pay this rate plus a spread of points on top of it. So if the prime rate was 3% and you had a margin of three points, you would pay 6% until the prime rate shifted.
LIBOR This is the London Interbank Offered Rate and is intended to be the rate that banks in England loan money to each other. It is a rate commonly used with financial contracts, but over the past year there have been scandals about rigging this rate, so it’s one to watch. This would be an index that would have points tacked on just like the prime rate.
Origination Fee This is also called an “O Fee” and is intended to cover the cost of processing the loan (but is truly outrageous!) These can be paid out of pocket, but usually get added to the principal and increase the total amount of your debt. The amount will depend on your credit worthiness, income and other factors. It is usually set as a percent of the loan. If you borrow $20,000 and have a 5% O Fee, you’ll have $1,000 tacked on!
Disbursement Fee This is a fee charged to pay out what you borrowed. Doesn’t make a lot of sense and seems like the origination fee should have covered this, but look and see and you might find this one tacked on to your principal as ell by your private student loan provider!
Insurance Fee This fee can be tacked on by your lender if they choose to insure your loan against any number of conditions that might prevent you from repaying. Rather than being added to the principal, this would be deducted from the amount that is disbursed to you lowering what you are able to use to pay your school tuition and fees.
Deferment Fee This is a charge that can be levied if you request to defer your loan for any reason.
Repayment Fee This can be tacked on by your lender at the start of your repayment period and will be a percentage of the outstanding balance at that point.
Miscellaneous Fees These can vary by lender and are just opportunistic profit-seeking add-ons to watch out for.
Truth in Lending Disclosure Also called the TIL, this must be sent by your lender to you or on or before when your loan is disbursed. This must disclose your APR, the dollar amount the interest will cost you, the principal amount you’re financing and the total you will pay off by the time your loan is paid in full.
We hope these definitions and samples can help you crack the code on your student loan. The bottom line is that private student loans will come with more and higher fees than will federal student loans. But best of all is to not borrow at all if possible! Remember, not everyone needs to go to college to earn a substantial living. High paying professions such as transmission repair technicians are actively recruiting youth into this much-needed industry.
But if you’re more into engineering than engines, college may be your path. And if you’ve already got student loans, we can help! Check out our free student loan tool to view all of your loans – public and private – in one easy interface.
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