It’s perfectly understandable that no one wants to be paying extra on student loans. Those bills can be high enough as it is! Never mind the fact that there are plenty of other things you could put that money toward. Today’s students are spending far more on a college education than any previous generation has.
Go back to the baby boomers, and the great debt of their lives was the mortgage on their homes. It might take 20 years or so to pay it off, and of course, they would accrue interest on the debt, but it was manageable and gave them a home to live in along the way. For millennials and every generation after that, that new “great debt” is their student loans. Student loans are a more suffocating burden as interest rates are fixed without quality refinancing options. And while you can always sell your home, you can’t sell your degree to get out of the payments.
Do you plan on paying extra on student loans? Student debt is perhaps the greatest financial challenge of the generation. It saps away income and gets in the way of savings. A common theme of student loan debt is that students don’t understand what they’re getting into when they go to college in the first place. Learning about what you have on your plate and creating a payment plan that will work in your favor is the best way to move forward with student loans.
Why paying extra on student loans can help you in the long run
Currently, student loan interest rates range from 2.75% to 14.5%. Factors impacting the interest rates include the level of education for which the loan is taken out, as well as whether or not the loan is a federal loan or though a private lender.
Most student loans are under 10%. Single digits may not seem scary, but even a half a percent can create stark differences in what you pay over the life of the loan.
For round numbers, let’s look at a $10,000 loan. The critical thing to realize is that your interest rate does not accrue monthly or annually, but daily.
A 6.5% interest rate divided by 365 days in a year equals a daily interest of .0186%.
.0186% of $10,000 is $1.86 of interest every day. That means you’re paying an extra $55.80 on your loan every 30 days.
Twelve months of similar interest (although it would go down slightly each month) is another $669 added to your loan.
Now, let’s look at the impact a few percentage points has each way.
- 6% = .0164% per day = $1.64 per day = $49.20 per month = $590.40 per year
- 7% = .019% per day = $1.90 per day = $57 per month = $684 per year
- 7.5% = .02% per day = $2.00 per day = $60 per month = $720 per year
- 8% = .022% per day = $2.20 per day = $66 per month = $792 per year
- 8.5% = .023% per day = $2.30 per day = $69 per month = $828 per year
Should you make extra payments on your loans?
In brief, the larger your interest rate, the quicker you’ll want to pay it down. You can either pay one sum above the required amount or pay your bill more than once a month. Paying extra on student loans more frequently works to lower your accruing interest more often.
You can already see small changes in interest make a difference of hundreds of dollars in only one year. Over the lifespan of a substantial student loan, this can accrue to paying multiple thousands of dollars extra on a loan that is already big enough. Even if you don’t have a tremendous amount to contribute towards additional payments, every bit will help make a difference in your financial well-being.
How do you handle your student loans? Do you pay the minimum amount each month, or do you like the process of paying extra on student loans?