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repaying student loans

Adulting Student Life

Understanding Student Loan Interest Rates

December 16, 2021

What Is Student Loan Interest?

Loans are not free. When you borrow money, you will not only have to repay the money you borrowed, but you will also have to pay interest to the lender.

The best explanation of interest is that it’s the cost of borrowing money. Whether you have federal or private student loans, you will be charged interest until the debt is completely paid off. Thus, when you are through the process of repaying the loan, you’ll pay back the original loan amount (known as the original principal) plus a percentage of the remaining balance (interest).

Private student loan interest rates range from approximately 1.04% APR (annual percentage rate) to 14.50% APR. Many private student loan lenders provide both fixed and variable interest rates, allowing qualified students to pick the option that best suits their needs. The interest rate you qualify for will be determined by your creditworthiness and, if applicable, that of your cosigner. On student loan lender comparison pages, you can quickly compare lender rates, terms, and advantages.

A simple daily formula or a compounding interest formula are commonly used to calculate interest. It’s essential to know the differences between these two formulas to understand how interest is calculated.

How Does a Simple Interest Formula Work?

Once you have a simple interest loan, also known as the simple daily interest formula, interest is calculated based on your remaining principal balance. This formula is used to calculate interest on all federal student loans. Some private student loans will also utilize the simple daily interest calculation formula, which you can find out in your loan’s terms and conditions.

How does the compound interest formula work?

In the case of the compound interest formula, the interest of your loan is calculated based on your interest rate to your principal (the original amount you borrowed) as well as any outstanding or unpaid interest that has been added to your loan. That is, the cost of your loan will be calculated based on both the original loan amount and any ongoing interest. Sometimes people refer to this as interest on interest.

How Is Student Loan Interest Calculated?

Let’s look at how student loan interest is calculated and how much your loan will cost. Federal student loans which can either be subsidized or unsubsidized loans mostly have fixed, low-interest rates. Whereas private student loans come from private lenders, each private loan will have its terms and conditions. While a private lender may use the simple daily interest formula, they may use a compound interest formula to determine the daily cost of your loan.

Simple Interest Formula

The simple interest calculator estimates an amount that includes the principal plus interest.

Simple Interest Equation (Principal + Interest)

A = P (1 + rt)

Where:

A indicates the Total accumulated Amount (principal + interest)

P indicates the Principal Amount

r indicates the Rate of Interest per year in decimal; r = R/100

t indicates the Period (months or years)

Compound Interest Formula

To use the compound interest formula you need to know the principal amount, annual interest rate, time factor, and the number of compound periods. Once you have all figures, you can calculate the compound interest.

The formula for compound interest, including principal sum, is:

A = P (1 + r/n) (nt)

Where:

A indicates the future value of the investment/loan, including interest

P indicates the principal loan amount

r indicates the annual interest rate

n indicates the number of times that interest is compounded per unit t

t indicates the time the money is invested or borrowed for

Understanding how interest works while repaying student loans may go a long way toward lowering your borrowing expenses, whether for student loans or any other sort of loan you may take out in the future.

BIO: Robert McMillen is an entrepreneur, finance professional, consultant, and passionate writer at Instant Loan Online. For many years using his industry knowledge and experience he has helped his clients to create more wealth and reduce costs.

Adulting Student Life

How to Prioritize (Not) Paying Off Your Student Loans During the Moratorium

May 24, 2021

Student loans have been in the news recently as there has been buzz surrounding some sort of government relief soon. If you are a borrower looking for relief, you may be wondering what your best move is regarding repayment. How you act now could help you gear your finances up for any upcoming legislation on the matter.

What you are about to read will seem counterproductive – but stick with it till the end.

Hold Off On Repayment Until the Moratorium Expires

It may seem crazy not to take advantage of our current relief period to pay down some of those federal loans, but, instead, consider taking what money you would be paying, interest included, and putting it into a separate savings account.

This interest-free period means that the total amount you have to pay back won’t increase in the interim. By putting the money you would typically use for loans aside, you can create a pool of funds that will amount to a significant sum whenever the moratorium is allowed to expire.

The Political Future of Student Loans is Uncertain

President Biden has stated that he is open to $10,000 of blanket student loan forgiveness, eliminating some of the economic strain for many borrowers. However, there is reason to believe that the relief will be much broader.

The last major stimulus bill extended the moratorium until September 2021 and made any future loan relief tax-exempt. Even though it was said that this would be the final extension, President Biden announced in December 2021 that the freeze would be prolonged through May 1, 2022. Though we are not quite sure what will happen, there is strong evidence that lawmakers are gearing up for some type of comprehensive action regarding student loans. We also know that student loan relief has some bipartisan support, though disagreements exist.

The Scenario You Want to Avoid:

Let’s say you owe $15,000, and pre-COVID, you were paying $300 a month, including interest. You decided to make monthly payments throughout the pandemic even though the interest was frozen and payments were paused.

Now we’re over a year into the pandemic, and the moratorium on student loan repayment is extended until at least May 1, 2022. Let’s imagine that the progressive wing of the democratic party can convince Joe Biden to raise the initial offer of $10,000 to $25,000 of loan forgiveness.

You’ve essentially wasted all the money you’ve been paying back throughout the moratorium because your loans were forgiven.

If you had put that money aside, you’d have a significant amount of cash.

What If Nothing Gets Forgiven?

If there is no action taken to combat the student loan crisis, then we can assume payments, as usual, will resume in 2022. If you had been saving your monthly payment amount, then in May 2022, you can make a large lump sum payment that puts you back on track as if nothing happened.

Why Not Paying Right Now Makes Sense

Because we know something will likely happen regarding the student debt crisis, and because we don’t know exactly what that something will be, the best course of action is to save that money you would normally use for repayment.

You either have some (or all) of your loans forgiven and have a large sum of money available, or you resume payments like nothing ever happened. By not paying during the moratorium, it’s a win. However, by paying, there is a chance you’ll lose.

BIO: Veronica Baxter is a writer, blogger, and legal assistant operating out of the greater Philadelphia area. She writes for the Law Offices of David Offen, who is a successful bankruptcy lawyer in Philadelphia.

This blog was originally published in May 2021. It was updated in December 2021 to reflect the student loan moratorium extension.