Managing Student Loans

Student loans in the United States are governed by the Higher Education Opportunity Act (1965) and the Truth in Lending Act (1968). These two acts require the APR of a student loan to be transparent.

The annual percentage rate (APR), sometimes called the nominal APR, is the interest-only cost of financing a student loan over the year. This means that it represents the simple interest rate, with no compounding. This is the least valuable measure for comparison of total student loan costs.

Nominal APR should not be confused with effective APR, (EAR), which is the total annual cost of financing the student loan, averaged over the life of the loan. Unlike the APR, the EAR includes both fees and compound interest. However, some fees are not included in the calculation of the effective APR, usually when the lender considers the fee a pass-through fee and not a cost of lending.

However, in the United States, APR has a different meaning. Specifically, the APR is the periodic interest rate, multiplied by the number of compounding periods in a year. As well, the APR must also include specific non-interest charges and fees. In general, the fees which are included are considered a cost of lending, while the fees which are not included are considered pass-through fees which are not a cost of lending.

In particular, Regulation Z of the Higher Education Opportunity Act, Title X, requires private education lenders to make three sets of disclosures to potential borrowers. The first disclosure includes general information about loan rates, fees, and terms. The second and third disclosure must include specific updated information about loan rates, fees, and terms, including the APR.

Disclosure one is the Loan Application and Solicitation Disclosure, which is given as part of general information about student loans. Disclosure two is the Loan Approval Disclosure, which is a transaction-specific disclosure when the loan is approved. Disclosure three is the Loan Consummation Disclosure, which is a transaction-specific disclosure when the loan is consummated.

At each point, the prospective borrower has a chance to cancel the transaction. At the first disclosure, no transaction has yet been made. At the second disclosure, the student has 30 days to cancel the transaction. Finally, at the third disclosure, the student has three days to cancel the transaction.

If the student loan has a fixed rate, the APR cannot change during that time. However, if the student loan is a variable rate loan, the APR will change each time the rate changes.