Interest Charges on Student Loan Debt

Student loan debtIf you have recently graduated from college, you likely have loans. As the costs of college increase (they’re rapidly approaching $1.5 trillion!), so does the debt burden that young graduates are feeling. But how much is that student loan debt costing you? Here is a quick look at the math behind student loans.

The Average Student Loan Debt

According to the Wall Street Journal, the class of 2015 carries the most debt out of any graduating class (until the class of 2016 graduates of course). Their average burden: $35,000 per student. If we use the 2015 student loan interest rate of 4.29% we can determine how much these loans are costing every year.

 

The Annual Costs of a Student Loan

Based on a 20 year amortization, using the numbers above, your loan will cost you $217.48 per month.

Your first payment will pay $92.35 in principal, and $125.13 in interest charges.

It is not until nearly 4 years later that the amount going to principal will outweigh the amount going to interest.

On your 240th payment, 20 years after you started to repay your loans, you will have paid $17,195.09 in interest charges! Roughly half the initial cost of your education.

 

How to Cut those Numbers

While you are still attending school, your loans are usually subsidized (or at least deferred). Making small payments while in school can help, even if they don’t seem to add up to much.

If you were to pay $50 toward your loans each month, your loan balance by the time you graduated would be $2,400 less (or $32,600 total). It may not seem like much, but here is how those number play out.

Your payments would be $202.57 per month.

Your first payment will pay $88.02 in principal, and $116.55 in interest charges.

On your 240th payment, you will have paid $16,016 in interest charges.

Those small payments end up saving you nearly $1,200.

Now let’s suppose that you have already started paying on your loans. So paying them down before you graduate isn’t an option any longer. Instead, add $50 to each month’s payment. Using our numbers above, we can see that your payments increase to $267.48, but you immediately start paying more toward principal than toward interest.

Your loan is paid off after 14 years 8 months (5 years 4 months earlier), and you spend $12,274.70 in interest charges.

Increasing your payments by $50 each month ends up saving you almost $5,000 over the lifetime of the loan.

 

Don’t get Dragged Down by Student Loan Debt

The costs of higher education are rapidly increasing. But you do have options. There are plenty of great jobs that don’t require a degree. There are plenty of jobs that allow you to earn a lot of money after graduating. And there are plenty of ways to pay off your student loan debt faster than normal (just check out how Joe Mihalic paid off his Harvard debt in less than a year). It might take some sacrifices, but you don’t have to be a slave to your student debt!

 

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