Today’s article i want to give you a quick idea of how interest works on student loans and show you a brief calculation now that said this is not a simple topic okay i’m gonna try to make it as easy as possible and explain it as quickly as possible so that you can at least have an idea of what a student loan is costing your student or you if you’re a cosigner now this is actually really important in fact we’ve met families that were completely shocked.
How much interest they were paying and how it was accumulating now of course we know that we want to avoid student loan debt as much as possible and so if that is something that you’re interested in looking into more strategies to get rid of these loans or to avoid the loans in the first place with a new strategy on paying for college without student debt in case they are taking out those loans and so that’s why we’re creating this article so let’s go ahead and begin so what is interest interest is basically money paid to the lender as a cost of borrowing.
The money so it’s basically their fee for loaning the money now this is calculated as a percentage based on what is called a principal that is the amount that you or your students or you both borrow now direct loans specifically are loans where interest accumulates daily so this is something that you will see when it comes to paying for college now at the time of recording this article the current interest rate is actually 3.73 for undergraduate students which is one of the all-time lows so it’s not like it’s a huge percentage .
However depending on the amount that’s borrowed and the amount of time it takes to pay back that can still lead to thousands and thousands of dollars more that a student is paying for a degree if they were to borrow the money versus getting say scholarships or some other source to pay for it that doesn’t include that interest rate i’m going to include a link in the description to the latest interest rates that way you can always make sure that you’re up to date because these do fluctuate every single year so every year there’s an updated rate so even if your student is say a freshman in college then they will have a different rate every single year while they are in school and that rate is set by the federal government not necessarily say the us department of education.
Now i have another article explaining the different types of student loans and specifically the different types of government loans and private loans so i’m going to link to that if you want more of a description on that this article i want to focus just on the interest rate now when we’re calculating how much we’re going to pay an interest it’s important that we have a few key numbers first we need principal and this is the total sum of what has been borrowed then we have interest rate which is the percentage that the bank or lender or government is charging on that money then we have the payback period this is basically
How long it will take for families to pay this back now the typical length of time is supposed to be 10 years but actually on average students are taking over 21 years to pay back their student loans so we’re talking about 18-19 year olds borrowing money for longer than they’ve been alive at this point so i just want to point that out because you don’t want to underestimate what this the amount is truly going to cost your family you may want to take a look and say okay well if we take the average amount of time what would it cost us then but either way the payback period is the amount of time it takes to pay it back just like it sounds like now before i get into the actual calculation i do want to say that if your student has not graduated from college yet there is still the opportunity to secure debt free money to pay for college in fact i cashed my last scholarship check on the way home from college graduation i know that sounds surprising to a lot of families but your student can start and continue applying all the way through their college experience for scholarships so say your student has to borrow nine thousand dollars for their freshman year.
They can change that and maybe get scholarships to reduce that amount they need for the following
year or we’ve even had students where they got to where they didn’t have to borrow anything their
remaining three years once they realized they could continue applying so if that’s something
that’s of interest to you and your family then i really recommend attending our free training i’m
gonna link to it below but this is our six steps to securing scholarships so it’s a free training
all about where to find scholarships how they work how to spot scams everything you need to know to
get started on those so take advantage of that as long as your student has not graduated from
college then your student has this opportunity in front of them 100 so let’s talk about how to
calculate interest most loans accumulate interest from the moment they are borrowed so the only
exception to this is subsidized loans again i’m going to link to the other article that describes ..
The difference between these now just a quick note i’m going to keep the interest rate the same
just for the sake of simplicity in this example so when we’re talking about calculating interest you basically want to take the amount that you borrowed which is the principal and then we want to multiply that by what we call the interest rate factor this is basically the interest rate divided by 365 divided by the number of days in a year so basically the interest rate is what you will pay for the whole year of borrowing the money so we need to divide that by day then when we get that we have basically our in our interest per day so then we want to multiply it by the number of days since our last payment and that gives us our interest amount so here is a very quick simple example we used 3.65 percent simply because it rounded out to very pretty numbers here so say your student borrows five thousand dollars if we take the interest amount which is 3.65 divided by 365 days basically they’ll pay you can see they’re a fraction of a penny per day and then we multiply it by 30 days and we find out that your student basically will be accumulating 15 in interest every 30 days let’s get into a more realistic example so again we have say the amount of the loan then we’re going to multiply it by the interest rate we can divide that by 365 and get our daily interest .
So here is again five thousand dollars right now at this time the interest rate is three point seven three percent so that equals 186 dollars and fifty cents fifty cents of interest per year when we divide that by 365 it shows that we’re accumulating about 51 cents per day now with out making any kind of payments in the
meantime if we just let this accumulate basically your student if they borrow this their first
semester freshman year they’ll be looking at four years plus the six months after graduating college
before the payments kick in when you figure that out it’s about 1550 days so that amount of days
times 51 cents is about 800 in accrued interest so here is how it looks like for four years so
freshman year we have the five thousand dollars that we are borrowing plus the interest of 51
cents a day which is an extra 800 almost sophomore year junior year senior year again for the sake
of this example i’m using the same interest rate
I’m assuming it doesn’t fluctuate but yours will every year they update the interest rates and then of course as your student gets closer to graduation the amount of days should go down so at the end if we end up adding all of the interest that accumulated while your student was in college you’re looking at an extra two thousand forty five dollars and ten cents so the total amount by the end of college is twenty two thousand forty five dollars and ten cents now this is not the total amount that will be paid over the life of a loan this is simply the amount borrowed plus the interest accumulated while in college if your family does not make payments on the interest that’s accumulated while your student is in college then that interest amount is rolled into the principal when they graduate from college and then that is their new principal amount now
this is called capitalization so they capitalize the interest by adding it to the principle of what was borrowed.
So this is important to understand a lot of families actually will pay off interest while in college that way at least at the end of the four years they are only having to pay interest on the amount borrowed not on the amount that is added to what they borrowed so now that you have an idea of how it’s calculated i really think that ultimately the easiest thing to do is to look up a student loan calculator you can plug in the different amounts you can say how long it was borrowed for you can put in the different interest rates and it will show you what the total cost of the loan is but still for some of you you want to make sure that you understand how this is calculated and that’s why i wanted to create this article now again if you want to understand the different types of student loans
What unsubsidizes versus subsidized versus private et cetera i’m going to link to that article below or you can click the card wherever it is on this screen also don’t forget about that free training i mentioned so our free training on six steps to securing scholarships is so important if your student still has even one school year left of college they need to be applying for scholarships because that can eliminate all of this stress about how much they’re going to have to pay an interest for their remaining amount of time in college
and remember we’ve had students go from having a bar for freshman year to getting not only break
even for the following year but even to an overage.