Watch Out for These Things When Accruing Student Loan Interest

College graduation day is supposed to be enjoyable, but when there is a massive student loan debt attached to your diploma, it is hard to celebrate. 

Student loan debt can make it very difficult for graduates to get established in their lives. On the plus side, economists consider student loans to be healthy debt, as they provide educational opportunities.

Sadly, amid their student loan debt, many students go out into the world with credit card debt as well. The combination of the two is a terrible situation to be in. Up next we’re going to tell you about things to watch out for.

 

Watch Out for These Things When Accruing Student Loan Interest
Photo credit: https://www.credible.com. 

 

Overview of the Situation

Students owed an estimated $1.31-trillion in 2017 loans. Every second, roughly $4,000 in student debt is accumulated. A 2016 college graduate’s total loan debt was $37,172 (up 6 percent from the previous year). This is according to debt.org

According to US figures for 2016, the Department of Education, at four-year public schools, more than 20.5 million students are enrolled in college. The average tuition for in-state students was around $9,410. 

The amount was around $32,405 for private schools. Add another $11,000-$13,000 for room and board, and you can expect it’ll cost you at least $20,000 a year to go to school, and that’s for state colleges and universities only. 

When you’re choosing the most selective colleges, the expense is around $60,000 annually.

If you want to know more about student loans, here are the three things you need to be aware of. 

Proper Calculations

Usually, interest rates on federal loans are 6.25% to 8% in the neighborhood; interest rates on private loans, on the other hand, vary from 12% to 13% daily and can often increase to 28%. 

Private loans also offer fewer flexibility when it comes to repaying them. Borrowers who fall behind on their federal loans, such as forbearances and phased repayment plans, have options available. 

Some private lenders often provide assistance to borrowers facing financial difficulty but appear to be less forgiving.

How to Calculate

To see how student loan interest is calculated in practice, get out your pen and paper and follow with the example below. 

This calculator below for student loan interest does the calculation for you. Say you borrow $10,000 at an annual interest rate of 7 percent for this example. 

For a typical 10-year repayment plan, the monthly payment will be about $116. Here is how you make the calculation.

  • 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%
  • 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
  • Find your monthly interest payment. Multiply your daily interest amount by the number of days since your last payment.
    • $1.90 x 30 = $57

Debt regularly accrues on a student loan in a typical repayment situation but usually does not compound periodically. 

In other words, on each day of the payout period, you pay the same amount of interest per day — you don’t pay attention to the interest earned the previous day.

Here’s a helpful loan calculator you can try out! 

Loan Forgiveness

After 20-25 years of student loan repayment of federal student loans, you will seek student loan forgiveness-depending on whether you hold undergraduate or graduate student loans, respectively. 

There’s a caveat. You can owe income taxes on the amount of forgiven federal student loan debt. For instance, if you have $20,000 in federal student loans forgiven after 20-25 years, you may owe income taxes.

Capitalization

Watch out for this. There are a few cases where unpaid debt is built up and capitalized or applied to the principal balance of loans. 

Capitalization means you pay interest on top of the interest, raising the overall loan rate. The capitalization of outstanding debt arises for federal student loans when the following happens.

  • When the time of grace expires after an unsubsidized loan.
  • After a period of forbearance.
  • For unsubsidized loans, after a deferment period.
  • Pay as you earn (REPAYE) if you leave the revamped pay (PAYE)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.

You won’t have to make principal and interest payments during your deferment period if you want to apply for a student loan deferment. But your interest will continue to accrue when your loans are deferred. Any accrued interest will be capitalized.

This can increase the total cost of your loan. When you can pay your accumulated interest before capitalization on it, you will hold down your overall loan rate.

Watch Out for These Things When Accruing Student Loan Interest
Photo credit: https://www.nafcu.org. 

 

Conclusion

Student loan debt will affect your debt-to-income ratio, impacting the ability to apply for a mortgage and the rate that you will receive. Paying it off as fast as you can is your best choice so you don’t end up paying interest on interest.