The Cost of Borrowing

When you repay a loan, the amount you must repay can be broken down into two parts: principal and interest.

Your loan’s principal is based on the total amount you borrowed. Let’s say you borrowed $4,000 for eight semesters. When you first graduate, you owe $32,000 in principal. After that, interest builds on your principal at a certain percentage, called your interest rate. Think of interest as the fee you pay for borrowing.

Over the life of the loan, unpaid interest may be capitalized, or added to the principal of the loan. Future interest payments are then based on your new, larger principal. You’re paying interest on your unpaid interest.

Federal loans have other fees, which amount to approximately 1 percent of the amount you borrow in subsidized and unsubsidized loans for the 2018-2019 school year.

 

Page (3/14)