Private student loans : understanding the cost of borrowing

              The Oklahoma College Assistance Program (OCAP)
provides college access, aid awareness, financial literacy
and student loan management programs and services
for students and parents. We have served Oklahomans
for more than 40 years as an operating division of the
Oklahoma State Regents for Higher Education.
Remember, always exhaust all federal loan options before
considering private or alternative student loans!
Other questions about paying for college? OCAP can
help. To learn more, call 800.442.8642 (toll-free), e-mail
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Private Student Loans
Understanding the Cost
of Borrowing
The Truth in Lending Act Disclosure
The federal Truth in Lending Act requires lenders to
disclose key terms of the lending arrangement and all
costs in a uniform manner. An important component
of the disclosure is the Federal Box, which appears near
the top of the Truth in Lending Act disclosure. Using the
information from Lender B in the comparison to the left,
the Federal Box would look like this:
Annual
Percentage
Rate
Finance
Charge
Amount
Financed
Total of
Payments
The cost of
your credit
as a yearly
rate.
The dollar
amount the
credit will
cost you.
The amount
of credit
provided to
you or on
your behalf.
The amount
you will have
paid after
you have
made all
payments as
scheduled.
5.05% $1,407.80 $2,425.00 $3,832.80
Note that while you will be repaying $2,500.00, the
Amount Financed shows $2,425.00. The Amount
Financed is calculated by subtracting any prepaid finance
charges ($2,500.00 minus $75.00, or $2,425.00).
Putting it All Together
Imagine that you are considering whether to borrow
$2,500.00 from Lender A or Lender B in the chart below.
After weighing the options, you’ve decided to delay
making payments on your loan until you graduate, which
you anticipate doing in four years. You also receive a six-month
period following graduation (grace period) before
making payments.
Which loan is best for you? While the APR is a good
measurement, it may not always be the best indicator
given your particular circumstances. You also need to
consider whether the monthly payments fit your budget,
and whether the fee allows you to have all the money you
need at the time you take out the loan.
Loan Comparison
Lender A Lender B
`` Interest rate: 5.00%
`` Fee: $50.00
(2% of loan amount)
`` Loan term: 51 months
in-school & grace
period; 10-year
repayment term
following graduation
`` Frequency of
compounding interest
while you are in school:
semiannually
`` Finance Charge:
$1,476.40
`` Monthly Payments:
$32.72
`` Total of Payments:
$3,926.40
`` APR: 5.21%
`` Interest rate: 4.75%
`` Fee: $75.00
(3% of loan amount)
`` Loan term: 51 months
in-school & grace
period; 10-year
repayment term
following graduation
`` Frequency of
compounding interest
while you are in school:
annually
`` Finance Charge:
$1,407.80
`` Monthly Payments:
$31.94
`` Total of Payments:
$3,832.80
`` APR: 5.05%