While many graduates are bogged down with high interest rates and burdensome payments, many don't understand the terms of their loans. At Credible, we've helped thousands of graduates understand how their interest rates compare with current market conditions and how they might be able to save thousands by adjusting their terms. We've complied some data to help you visualize how different loan repayment options could impact your monthly payments and total loan amount by manipulating a few variables on a $25,000 standard student loan situation.
Effect of increased interest rate: $25,000 loan; 10-year period
- 4-percent rate: At this rate, you would make 120 monthly payments of about $253 over 10 years. The total interest paid on your loan would be $5,374, bringing the total amount paid to $30,374.
- 6-percent rate: With a 2-percent-higher interest rate, you would make 120 monthly payments of $277 over 10 years. The total interest paid on your loan would be $8,306 bringing the total amount paid to $33,306.
As it appears that there is only a $25-dollar-a-month difference, in the short term this may seem insignificant, but over the course of the loan, you would save around $3,000 dollars in interest payments. This is money that you could be putting towards a new car or your first home.
Effect of extended repayment
On a 4-percent-interest loan under the terms of the situation above, by simply extending your repayment period five years, your monthly payments will drop to $185. The total interest paid on your loan would be $8,286, bringing the total amount paid to $33,286 (roughly the same as a 10-year, 6-percent loan).
This effect shows that extending your payment period can be compared to a rise in your interest rate. This may seem better in the short term as your monthly payments are reduced; however, your overall total repayment increases, as well as the burden of student loans, for another five years.
Effect of prepayment: $25,000 loan; 10-year period
- 4-percent interest rate; $253 (+$100) monthly payment: With an additional $100 towards your monthly payment each month, the total interest paid on your loan would come to $3,563. That saves you over $1,800 compared with just making minimum payments. It would also eliminate roughly 40 loan payments, or about one third of your total repayment period.
- 6-percent interest rate; $277.55 (+$100) monthly payment: In this situation, the total interest paid on your loan would come to $5,348. Compared with the 6-percent-interest, 10-year-payment-period example, you would save around $3,000 and have your loan payed off 40 months in advance. If you have more discretionary money available, it may be better to pay down your loan more quickly as it is evident that it can save you thousands of dollars in the long run.
Your repayment goals will determine how you choose to pay on your loans. If your goal is a lower monthly payment, refinancing may enable you to extend your loan five years and lower your monthly payment but still have the same total repayment as your current loan. If you have a competitive interest rate already, see how much you could comfortably put towards your loans, and see how much you could save using a standard loan repayment calculator.
If you are interested in reducing your interest rate and changing your loan terms by refinancing, visit Credible.