Student Loans Financing Issues
I know most of us don’t want to get into the math weeds on student loans. It’s too depressing to start with And yet, you should give it a bit of a try. Please at least scan the article; look at the highlighted areas. There are some very big potholes that add tens of thousands of dollars in costs to the original amount borrowed. Look especially at the items next to a big dot. Highlights are mine. This article is from NerdWallet.com.
Calculate Student Loan Interest, Step by Step
Learning how to calculate student loan interest will help you understand what you’re really paying for college debt Teddy Nykiel
Feb 23, 2022
Learning how to calculate student loan interest will help you understand what you’re really paying for college debt. Interest on federal student loans and many private student loans is calculated using a simple daily interest formula.
To calculate the amount of student loan interest that accrues monthly, find your daily interest rate and multiply it by the number of days since your last payment. Then, multiply that by your loan balance.
How to calculate student loan interest
To see how to calculate student loan interest in practice, get out your pen and paper and follow along using the following example. Not a math person? Our student loan interest calculator below does the calculation for you.
For this example, say you borrow $10,000 at a 7% annual interest rate. On a 10-year standard repayment plan, your monthly payment would be about $116.
1. Calculate your daily interest rate (sometimes called interest rate factor). Divide your annual student loan interest rate by the number of days in the year.
.07/365 = 0.00019, or 0.019%
2. Calculate the amount of interest your loan accrues per day. Multiply your outstanding loan balance by your daily interest rate.
$10,000 x 0.00019 = $1.90
3. Find your monthly interest payment. Multiply your daily interest amount by the number of days since your last payment.
$1.90 x 30 = $57
For a student loan in a normal repayment status, interest accrues daily but generally doesn’t compound daily. In other words, you pay the same amount of interest per day for each day of the payment period — you don’t pay interest on the interest accrued the previous day.
Capitalization increases interest costs
In most cases, you’ll pay off all of the accrued interest each month. But there are a few scenarios in which unpaid interest builds up and is capitalized, or added to your principal loan balance. Capitalization causes you to pay interest on top of interest, increasing the total cost of the loan.
For federal student loans, capitalization of unpaid interest occurs:
When the grace period ends on an unsubsidized loan.
After a period of forbearance.
After a period of deferment, for unsubsidized loans.
If you leave the Revised Pay as You Earn (REPAYE), Pay as You Earn (PAYE) or Income-Based-Repayment (IBR) plan.
If you don’t recertify your income annually for the REPAYE, PAYE and IBR plans.
If you no longer qualify to make payments based on your income under PAYE or IBR.
Annually, if you’re on the Income-Contingent Repayment (ICR) plan.
For private student loans, interest capitalization typically happens in the following situations, but check with your lender to confirm.
At the end of the grace period.
After a period of deferment.
After a period of forbearance.
To avoid interest capitalization, make interest-only student loan payments while you’re in school before you enter repayment and avoid entering deferment or forbearance. If you’re on an income-driven repayment plan for federal student loans, remember to certify your income annually.
When do I start accruing interest?
Student loan interest typically accrues daily, starting as soon as your loan is disbursed. In other words, student loans generally accrue interest while you’re in school.
Subsidized federal loans are the exception — the government pays the interest that accrues while the borrower is in school, so borrowers generally don’t have to start paying interest on subsidized loans until after the six-month grace period.
How student loan payments are applied
Student loan servicers typically apply payments in the following order:
Outstanding fees
Outstanding interest
Loan principal
Using the previous example, with a $116 monthly payment — and assuming no fees — $57 would go toward interest and $59 would go toward principal.
About the author: Teddy Nykiel is a former personal finance and student loans writer for NerdWallet. Her work has been featured by The Associated Press, USA Today and Reuters. Read more
*************************************
First, this statement- “Make interest-only student loan payments while you are in school.” Does anyone tell you that? Nope. Otherwise, the interest begins to build up over the years you are in school. This is why people who look at their first loan repayment statements are confused about why the number is higher than they thought it should be. Their interest charged each year is added to their loans. It can run into thousands before you even graduate!
Second, subsidized loans are now based on federal needs-based guidelines. Not everyone qualifies. Subsidized means the interest that accrues is paid by the federal government while a student is still in school. Very few students qualify for subsidized loans these days. Unsubsidized means the interest each year you are in college and borrow CAPITALIZES unless you make those interest-only payments.
Third, look at all those loopholes- if you go into forbearance or stop making payments, you can trigger the horror of paying interest on top of interest crystallized into principal.
Finally, good folks with good jobs will be paying their student loans while their own children are trying to get a higher education. This phenomenon is already happening, with these numbers increasing yearly.
Please be a revolutionary. Refuse to PAY THEIR WAY. Take the time to educate yourself on alternative, viable paths towards your degree of choice- OR - trades training. With a bit of research, planning, and work, you can cut your loans by 1/2 or more.
Check out the book, ENOUGH! The College Cost Crisis, for the truth about scholarships, financing, and getting in touch with your student’s unique gifts.
I am grateful to share it is still a five-star read!
Until Next Time,
All My Best,
Bonnie Burkett
