How Do Student Loans Work

October 31, 2019 by  
Filed under Debt, Student Loan

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Paying for higher education can be challenging. In fact, most of the colleges (about 70%) in the US are unaffordable for most Americans unless they get student loans. It is a common method of financing a college education, and you might ask yourself “how do student loans work?” Most learners will have to borrow one or more student loans prior to graduation, partly because there are no government grants that can cover all college costs.

When students are considering student loan options, the question “how do student loans work?” is common. We have researched student loans and have come up with the answers you might need. This article highlights all that you need to know about student loans as it reveals what student loans are, the different types of student loans, and how they work.

An Introduction To Student Loans

For you to answer the question, “how do student loans work?” you must first understand what student loans are. Student loans are so common these days as higher education is a necessity. Essentially, if you get a degree, you have a better chance of getting a job. The right degree is an avenue to follow your passion and make yourself marketable in the job force. But, if you don’t have the capital to finance your college education, you might be interested in applying for student loans.

A loan is typically borrowed money that is repaid over time. In addition to repaying the total amount you borrow, most of the borrowers will have to pay for a fee known as the interest.

Interest, which is the fee associated with a loan, is charged for the use of someone else’s money. It is charged on a monthly basis based on the loan balance that you have not repaid. This means that it isn’t a onetime fee and is typically expressed as a percentage of the loan balance. In most instances, the student loans will come with a fixed interest rate, which doesn’t change over the loan’s life. However, a variable interest rate will change periodically such as on a monthly or quarterly basis.

Who Provides Student Loans?

To adequately answer the question, “how do student loans work?” you should know who provides the student loans. You can get a student loan from many sources. However, most of them come from the federal government through the US Department of Education’s Federal Direct Loan program. Other student loans may come from private lenders, such as banks, among other financial institutions, colleges, and state governments. In most cases, students borrow from the federal government primarily because federal student loans are cheaper, more available, and have better repayment terms.

Amount You Can Borrow

The student loans come with a loan limit that specifies the maximum amount a student can borrow. Some loans may allow students to borrow the full college cost, but other loans have lower fixed annual and accumulative loan limits. Student loans are generally considered good debts simply because you are investing in your future. However, you should not borrow excessively since too much can be strenuous to pay in the future. We recommend that you borrow as little as you need, not as much as you can.

For subsidized and unsubsidized loans, undergraduate students can borrow between $5,500 and $12,500 per year. Graduate students can borrow up to $20,500 each year on the direct unsubsidized loans. Direct PLUS loans are borrowed for the remainder of the college costs not covered by other financial aids.

Different Types Of Student Loans

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To adequately answer the question of how do student loans work, you need to know the different types of student loans. There are two types of student loans: federal and private.

Federal Loans

These are the most common as they are offered by the federal government. They include direct subsidized, direct unsubsidized loans, Direct PLUS loans, and direct consolidation loans. Direct subsidized and unsubsidized loans are also referred to as Stafford loans.

For a direct subsidized loan, the government pays the interest as you study and during the deferment periods. As such, these types of loans subsidize your education by offsetting the college cost. Subsidized loans are mainly available only to undergraduates who demonstrate that they need financial aid. The amount of the subsidized loan is typically capped to only cover the student’s financial need as determined by the Free Application for Federal Student Aid (FAFSA).

For an unsubsidized loan, students are responsible for any interest that accrues when in school or after graduating. These loans are available to both undergraduate and graduate students. The loan amount is determined by the cost of attendance at your college or university and any other financial aid you might be receiving. You qualify for this loan even if you have no demonstration of financial need.

Direct PLUS loans are available to graduate, professional students, and parents of dependent undergraduates. They are given by the US Department of Education. For you to get this loan, you should have a decent credit history and a credit check. The loan amount is typically intended to cover any expense not covered by other financial aids.

Direct consolidation loans apply if you have multiple federal loans, which are combined into a single loan from a single servicer. The loans are available to students who want to combine multiple federal loans into one.

The following are the facts of federal loans:

  • Interest is tax-deductible
  • Interest is tax-deductible
  • Interest rates are typically fixed
  • Unless you are taking the PLUS loan, you will not need a credit check

Private Loans

Federal loans are the best, but you can also opt for private loans. However, private loans offer much less flexibility. Private loans usually come from lenders not affiliated to the government, for example, a school, credit union, a bank, or a state organization. The amount and the repayments options are decided by the lender.

Some of the facts about private loans include:

  • The loans may require a cosigner and a credit check
  • There is a possibility that you will begin repaying the loan while still in school
  • The interest rate is not tax deductible
  • Interest rates fluctuate with the financial market, meaning that they will be variable
  • Some interest rates are very high and can reach up to 18%
  • Most lenders will only quote you an interest rate after applying, so you will have to compare the best lenders

How Do Student Loans Work?

HOW TO APPLY

You must first apply for a student loan for you to be awarded the loan amount. To apply for federal loans, you should file the FAFSA. The loans will be available through the college’s financial aid office. To apply for the private student loans, you need to contact the lender.

The eligibility for most private student loans is based on the credit of the borrower. Since most students do not have good enough credit histories, they will need a creditworthy cosigner. The cosigner acts as a co-borrower and is equally responsible for repaying the loan amount. Once the loan is approved, the borrower has to sign a promissory note that describes the terms and conditions of the loan, including the repayment options and interest rates. For federal loans, there is a Master Promissory Note (MPN) that lasts for up to 10 years of continuous enrolment at a single university or college.

How You Receive the Loan Amount

Federal student loans are sent to the college financial aid office. For private loans, the funds are sent either to the borrower or to the college financial aid office. If the funds are received by the college financial aid office, they are applied to tuition and college fees, as well as housing. Money left is refunded to the student to pay for supplies, books, and other college needs.

How to Repay

For you to address the question, “how do student loans work?” you must know how to repay the student loan. After graduating or when you drop below half-time enrolment, you should start repaying the loan. For federal loans, you will be offered a 6-month grace period after which you should start repaying. Federal loans involve a standard 10-year repayment term with equal monthly installments. You can get 30 years for a direct consolidation loan. Other repayment options include graduate repayment, extended repayment, income-based repayment, income-contingent repayment, and income-sensitive repayment plans.

For private loans, ensure that you know the repayment options before applying. Some lenders have more flexible repayment options than others. Some may even allow forbearance and deferment or renegotiating a high variable interest rate. We recommend that you go for a lender with the best terms.

Conclusion

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Student loans are a viable method of funding your college education. However, you should not default the repayment (120 days from the due date for private loans and 360 days for federal loans). To minimize the potential damage, only borrow as much as you need, ensure that you have chosen the right repayment plan, pay on time (every month), pay extra often, take advantage of saving opportunities such as interest rate deductions, tax deductions, and refinancing at a lower rate. As such, instead of asking, “how do student loans work?” you should be asking. “how can student loans work best for me?” We hope this article has adequately addressed the various types of student loans and how student loans work.

How to Calculate APR: A Complete Guide

October 1, 2019 by  
Filed under Credit score, Resources

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When building or rebuilding credit, many people turn to credit cards and loans to help establish their credit history and raise their credit score. When considering these credit vehicles, you will want to know how to calculate APR in order to determine if you can make your payments and decide which cards or loans are the best for your situation.

What Is APR?

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Whenever you borrow money, you will have to pay a cost for borrowing that money. This cost is referred to as the annual percentage rate, or APR. This rate is a percentage of the money you have borrowed. The APR is how the bank, mortgage company or credit card company can afford to offer money on credit. In order to make enough money to be worthwhile, banks must charge higher interest rates for riskier clients. If you have a low credit score or no credit history, you will often have to agree to higher APRs than people with better credit scores and longer credit histories.

APRS AND COMPOUND INTEREST

It is vital to understand compounding interest when learning how to calculate APR. Any time you borrow money, you won’t only pay interest on the money you borrowed. You will also pay interest on your interest. APR is compounded based on your daily or monthly balances. It is most often compounded daily and added at the end of the billing cycle to the balance of your loan or credit card. For example, if you make $1000 in purchases on a new card with a 15% APR, every day a portion of that 15% APR gets added to your balance. If your interest is compounded daily, after a year, you will have about $160 of interest due on the balance if no payments are made to the principal or balance.

When figuring out how to calculate APR, it helps to understand the differences between the various types of loan APRs and credit card APRs that you might encounter. The differences between these will affect how to calculate APR and how much money you could end up paying to use the loan or credit card.

Types of Loan APRs

Loans are an important tool and a necessity for almost every working adult. However, not all loan APRs are created equally. Sometimes, the 3% interest rate on one type of loan, such as a variable loan, will cost more in reality than a 5% interest rate loan that is a fixed rate. You must take these types of loans and rates into account as you figure out how to calculate APR.

FIXED APR

VARIABLE APR

TIERED APR

Types of Credit Card APRs

Most American adults will carry some credit card balance. Any time you carry your balance over to a new month, a portion of your APR is added to the balance. You must pay the interest or it becomes a part of your new balance as time goes on.

INTRODUCTORY APR

BALANCE TRANSFER APR

PURCHASE APR

CASH ADVANCE APR

PENALTY APR

How to Calculate APR

Depending on what you want to figure out about your APR, there are a few different ways to calculate your APR. We highly recommend using online calculators and Excel formulas to calculate your APR and the compounded interest. If you are determined to do the calculations yourself, you can find the formula below.

​ONLINE CALCULATORS

​EXCEL FORMULAS

​HOW TO CALCULATE APR WITH COMPOUND INTEREST

Conclusion

It is important to learn how to calculate APR so that you can figure out your effective APR, including compounding interest. There are a few different ways to calculate your APR and some variations depending on what in particular you want to solve for. Thanks to technology, it’s easier than ever to quickly figure out your effective APR with online calculators and Excel spreadsheets. Knowledge is power, and if you know how much it will cost you to borrow money, you have the power to make the best decisions to improve your finances and your credit score.

How Many Allowances Should I Claim

October 1, 2019 by  
Filed under Bankruptcy, Finance

How many allowances should I claim? That is the question many people ask when filling out their W4. Taxes are ever-changing, and rarely understandable for many people. Unless you work in the accounting industry, it's easy to see taxes as a tedious situation you pay little attention to. It's not uncommon to know only the basics regarding taxes (i.e. you pay them) and nothing more without an accounting degree or a job in the tax industry. While many people feel that taxes are boring, there's still a need for them. Without taxes, the nation wouldn't operate in a functioning manner. However, that doesn't mean you don't have questions.

When your employer hires you to work, you're given a W4 form to fill out. This form is a tax form that's short and sweet. Very little information is required to complete this form, but it's necessary you claim the correct number of allowances or risk miscalculating your income taxes at the end of the tax year. How many allowances should I claim? That depends on what you make, where you live, and how many people are in your family. There are other factors, too, and that's why you should understand what it means to choose allowances before you complete your form W4.

The Basics of Tax With holdings

How many allowances should I claim is not an uncommon question, but the other most common question people ask in conjunction with that one is why is my money being withheld from my paycheck? It's not unreasonable to ask this question. It's your money. You earned it when you worked, and you should know where it's going, and why your employer is taking it from you.

What Is Withholding Tax?

Withholding tax is money your employer takes from your paycheck to send to the appropriate tax entity within the Internal Revenue Service. Everyone who earns a living of a certain amount every year is required to pay income taxes to the government. It's how the government works fiscally. Your money is calculated and sent to the IRS by your employer to pay your taxes.

You then file an income tax return at the beginning of the following year for the prior year. On your income tax form, you disclose how many people live with you, how much you care for them, what you earned, and what kind of tax deductions and credits you have throughout the year. This tells the IRS how much you owe them, and they either send you a refund because you paid in too much in withholding tax or you send them a check because you did not pay enough in withholding tax throughout the year.

Tax Withholding Exceptions

If you are self-employed or you are a contract or freelance employee who receives form 1099 rather than a W2 from your employer, you do not have an employer. Your payroll taxes are paid by you when you file your income taxes. Depending on your filing status and your personal situation, you might consider paying income tax payments quarterly to avoid being hit with a large tax bill at the end of the year.

What Is an Allowance?

How many allowances should I claim? If you're here to figure out what you need to do when you're filling out your W4 form, you are not alone. What is an allowance? If you're asking how many allowances should I claim, you're probably also wondering what, specifically, is an allowance?

An allowance is a person. You get to claim one allowance per person in your household. For example, you are one allowance. Your spouse is another allowance. Any children or other dependents you have are each an allowance.

However, when asking how many allowances should I claim, do not automatically claim all the allowances in your home. This is where things get a little confusing. The more you claim, the less money you have withheld from your income taxes. The fewer allowances you claim, the more money you have withheld from your income taxes.

Factors To Consider

When deciding how many allowances should I claim, you must consider how much money you want to have withheld, whether you want a big refund, whether your spouse also has a job and has claimed allowances on his or her W4, and what you want to bring home each paycheck. Do you want to bring home more money each paycheck and have that income in your pocket, or would you rather pay it to the IRS and give them an interest-free loan for a year? Understanding how many allowances to claim is complicated because of the numerous options you have.

How Many Allowances Should I Claim?

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How many allowances should I claim? You're probably wondering this even though you have all this new information. It's confusing, and it's not always easy to figure out what to do and how to make the correct financial decision.

You're Not Required to Claim a Specific Number

Let's say you have a family of six. You, your spouse, and the four kids you and your spouse have together. You have a family of six, but that doesn't mean you're required to choose six allowances. If you do choose six allowances, you will have less withholding taken from your paycheck. This is because having that many allowances typically means you have more exemptions and tax breaks on your income taxes. This lowers the amount of your tax liability significantly, which means you owe the IRS less money.

 

If you choose to check the box for zero deductions, you will have the most money taken from your income taxes. This is helpful if you worry about being hit with a tax bill at the end of the tax year. It's hard to file your income taxes only to realize you owe money that you may or may not be able to afford. If you cannot afford to pay your tax bill at tax time, the IRS begins charging interest right away, and it's not cheap.

How Much You Bring Home

How many allowances should I claim? That depends on how much of your earned income you want to take home. Your paycheck is affected either way. If you choose to claim as many allowances as possible, you will bring home money in each paycheck. If you choose fewer allowances, you will have more money taken from your check each pay period.

Does Your Spouse Work?

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If your spouse works and he or she also claims an allowance on his or her W4, that's another factor to consider. How many tax allowances you claim might depend on whether your spouse is allowing you to have the most money withheld or whether you are allowing your spouse to share that duty with you. You must sit down together and decide which way works best for you financially.

What's Your Previous Tax Situation?

Finally, you need to consider your tax situation of the past. Do you typically get a big refund from the IRS or do you pay? If you're paying the IRS, you may consider lowering the number of allowances you claim, so you have more money taken out of each check. Now, you won't have to write a check to the IRS at tax time. If you get a big refund from the IRS every year, you're giving them an interest-free loan on you, but they are earning money from your money.

If you get a large refund, you are paying too much money that you should bring home in each paycheck. If you like receiving a large refund, that's your prerogative. However, you may consider increasing the number of allowances you claim, so you have fewer taxes taken out of each check. That money is better utilized every time you get paid than it is to sit in the IRS' bank account all year.

How to Figure Out Your Tax Withholding

If you're still confused, you might want to know the IRS offers taxpayers a useful tool designed to help you figure out how much income tax to withhold from each check. It's called the IRS Withholding Calculator, and it's easily found online.

This calculator asks you a series of questions designed to help you figure out how many allowances to claim.

  1. 1
    What's your filing status?
  2. 2
    Are you a dependent on someone else's return?
  3. 3
    How many jobs do you have?
  4. 4
    How many jobs does your spouse have?
  5. 5
    How many dependents do you have?
  6. 6
    Do you get a child or dependent care credit?
  7. 7
    How many kids get the child tax credit?
  8. 8
    How many kids qualify for the earned income credit?
  9. 9
    Do you get any other tax credit?
  10. 10
    Your income information
  11. 11
    Other personal information

Using the information you provide, the calculator will provide you with a suggestion as to how many allowances you should claim.

Conclusion

Taxes are confusing, and that's why so many people ask how many allowances should I claim? Ultimately, the number of allowances you claim is up to you, but these tools can help you make the best financial decision for your family. Every family and every financial situation differs, so take the time to consider your personal situation rather than taking advice from friends or family who have a different familial and income situation.