Understanding Student Debt Part II

In our last post we looked at the various components of a student loan. Now let’s look at an example to see how all the pieces fit together.

Judy graduates from college with $10,000 in loans. For this example we’ll say the current interest rate is 8.25 %t with a 10-year term. Judy’s loan breaks down as follows:

  • Loan Balance: $10,000
  • Loan Interest Rate: 8.25%
  • Loan Term (in years) : 10
  • Minimum Monthly Payment: $122.65
  • Total Payments: $14,718.49
  • Total Interest Paid: $4,718.49

The minimum monthly payment that Judy needs to make to complete her loan within the 10-year term is $122.65. After 120 payments of $122.65, Judy will have paid off her entire loan and $4,718.49 in interest.

Keep in mind that Judy can always increase her monthly payments. This will shorten her loan’s term and result in less interest paid. For instance, if Judy decides to pay $250 each month, her repayment plan breaks down as follows:

  • Loan Balance: $10,000.00
  • Loan Interest Rate: 8.25%
  • Monthly Loan Payment: $250.00
  • Number of Payments: 47
  • Total Payments: $11,734.15
  • Total Interest Paid: $1,734.15

By upping her monthly payment, Judy shortens the term of her loan to 47 months, or just under 4 years. She also reduces the total amount of interest she pays to $1,734.15.

Let’s say that, instead of upping her monthly payments, Judy skips a few. In fact, let’s say she stops paying the loan altogether. That’s bad news for Judy. Because this will affect her credit rating and the loan company will take action to recover their costs.

So if you are considering taking a loan, pay special attention to the basic terms to anticipate how much you’ll pay and how long you’ll be in debt.

If you want to calculate how much your loan will cost you (and how much you’ll need to make to keep pace with your payments), you can use the calculator:

http://www.finaid.org/calculators/loanpayments.phtml

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