How is Interest Calculated on Student Loans?

student loan

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.

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