How Interest Rates Affect Student Loans

Availability of student loans may be influenced by various factors, among the key factors that should be noted include the interest rate. The interest rate has a way of affecting the much that will be repaid, the time to be taken and the number of students who will take the loans. That is why its increase should be well evaluated since it has more of adverse effects. Below are some of the ways of how interest rates affect student loans.

The amount to be paid

The interest rates are directly proportional to the amount one will pay. An increase in the interest rate will make one pay more interest on their loan hence more amount will be paid when the principle is added to it. If the interest rates will be lowered one will pay less interest hence a lower amount when the principal is added to the interest.

The repayment period

When interest rates for student loans are raised, it means that one has to pay more to repay their loan. This is because the higher the interest rate, the more interest one will be expected to pay for their loan. This would mean that one has to pay more for longer since they will have additional installments to pay should their loan be rescheduled. On the other hand, if interest rates are low, the less interest that will be paid hence a shorter repayment time than that which was stipulated.

The amount that can be saved by the student

Higher interest will affect the saving life of the student. If the interest rates are high one has to pay more for their loan. This will mean that they will have less purchasing power and eventually less amount will be available for saving. The lower interest rates make the loans less expensive hence they will have more to save.

Number of applicants

Students’ loans are a form of a revolving fund. When the ones who took the loans earlier repay the loans, the more the money that will be available to fund the others who are still applying. If the interest rates become high, most of the people will shy away from applying for these loans. This will mean that there will be not much that will be generated from the fund hence there will be limited disbursements since the money is not growing as no interest is being added to it. Lowering the interest rate encourages applications, and more people will be committed to repaying them on time hence the money will grow.

From the above, it is evident that an increase in the interest rates produces more of negative effects. Lowering the interest rates, on the other hand, encourages more people to take the loans hence a growth is noticeable on the money available. The funding authority should strive to achieve a balance in the interest rates so as to ensure more people benefit from the loans. This will help in funding students who will achieve to the development of the state or nation as a whole.