C ompounding Interest

Many private student loan lenders allow borrowers to delay loan repayment until they either graduate or withdraw from school. During that time, the interest continues to accrue and may be added to the principal balance of the loan. Adding interest to the principal balance is known as compounding
interest. Depending on the lender, interest can be added to the loan on a monthly, quarterly, semiannual, or annual basis.
Some lenders compound the interest near the time the borrower graduates from school, while other lenders do not ever add the accrued interest to the loan’s principal balance. It is always best to pay accrued interest before it is added to the balance of the loan. You will save money in the long run by doing so. If your lender compounds accrued interest annually over a period of four years on a $2,500 loan with an interest rate of 5%, you will end up having $538.78 added to the balance of the loan by the time you begin repayment.
The more frequently a lender adds the interest to the principal loan balance, the more interest a borrower will pay. Look for a lender that does not compound the interest, or a lender that does so infrequently and close to the time that repayment of the loan is scheduled to begin.

A Note About Private Student Loans:
Private student loans are meant to supplement not replace  federal student loans. Work with the financial aid office at your school to look into all other sources of federal, state, and/or school aid prior to borrowing a private student loan.

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