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 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.
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.
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.
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 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.
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:
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.
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.
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.
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.
DISCLAIMER – Subject to credit approval, loans are made by Bank of Lake Mills or MPOWER Financing, PBC. Bank of Lake Mills does not have an ownership interest in MPOWER Financing. Neither MPOWER Financing nor Bank of Lake Mills is affiliated with the school you attended or are attending. Bank of Lake Mills is Member FDIC. None of the information contained in this website constitutes a recommendation, solicitation or offer by MPOWER Financing or its affiliates to buy or sell any securities or other financial instruments or other assets or provide any investment advice or service.
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