I saw a post saying that two people left school 23 years ago with a combined debt of 70k. They paid 500 USD monthly for 23 years and still owe 60k.
I’m thoroughly confused. obligatory not from America.
In: Mathematics
Some payment plans have a required monthly payment that may be less than the interest charged each month, particularly for income based/driven plans for someone with a low income, and before the new SAVE plan.
This may result in a total balance that increases over time.
There are also situations such as reentering school or certain changes that add any existing interest to the principal balance
Student loan debt is first of all a bit different because unlike most debt, it cannot be discharged by bankruptcy. Once you have the debt, you have the debt, period.
The other side of that coin is that it’s a bit more flexible than normal debt, than say for example a mortgage.
With a mortgage you have the principal – the part that pays off the debt, the interest, the part that goes into the bank’s pockets based on how much principal is left, and things like insurance and other fees. You can’t pick and choose what to pay in a mortgage, you have pay all of it every month or else they come and take your house away.
With a student loan you *have some flexibility,* depending on the loan. So for example you can *only* pay the interest part, this the bank’s profit part. This means the principal is going untouched. So what’s happening in the example you gave is the monthly payment is *really* $1,000 a month, but the person is *only paying* $500. Hence the portion they owe isn’t getting decreased over time.
There are reasons why they might not be making the whole monthly payment, for example they might be expecting the debt to be paid off by the government either through an established program or because of the proposed student debt forgiveness program, or they might not have enough money to pay for the debt and are just paying what they can.
It works like most other debt – you take out an amount and pay it off over time.
Every month (or whatever period you pay back on) you look at the outstanding principle (how much you still owe) and calculate how much interest you owe on that amount (the fee for borrowing the money). When you make your monthly payment, you pay the interest _first_ and whatever is left over goes to reducing the principle. Next month, you run the calculation _again_ on the lower principle amount to figure out how much interest you owe that period.
For _most_ loans, you figure out how long you want to take to pay back the total principle (say, 30 years) and use that to figure out what your monthly payment will be every month, so that every month you pay back a little more principle, which means less interest next month, which means you pay back a little more principle, etc. You can do the math to figure out _exactly_ how much you need to pay every month so that in 30 years, the principal balance is zero. If you want to learn more about that, google ‘amortization schedule’.
Folks that have been paying small amounts for years have been paying 100% interest, 0% principle. The amount they owe never goes down – all they are paying is the fee for borrowing the money. If you do _that_, you’ll never pay off the loan.
Like with any loan, if you pay the bare minimum every month then you will be maximizing the amount you pay in interest. In your example, the two people must have been paying a minimum that only covered interest and did not cover principle.
Very long term loans can end up getting you to pay incredibly large amounts of money in interest if you don’t get ahead of the term and pay off early. A mortgage is the best way to see this. Lets say you get a mortgage for $400,000 for a 30 year term and only pay the required amount, never paying any extra. When the mortgage is paid off in 2054, you will have paid a total of $1,260,000 for a loan of only $400,000. The amount of interest alone will be more than twice the principle. Paying an extra $500-$1,000 a month over the term saves you hundreds of thousands of dollars.
This is also why the undesirables in our country shout “yOu tOOK oUt ThE lOAn sO pAy iT bACk!” with zero knowledge of the fact that there are a lot of loans that people simply could never pay back short of a massive financial windfall. This is the real issue, why the fuck we have massive interest on school loans from our own government is a whole other insane discussion, and personally I wish people would really try to fix the system in place by doing away with interest on school loans going forward, but we can’t have nice things in our legal mafia run country.
For federal student loans, they can be broken into 2 types: Subsidized and Unsubsidized. Subsidized loans don’t incur interest as long as the borrower is enrolled in an approved school at least half time. They only begin to accrue interest once you no longer meet that requirement, either through graduation or stop attending. These are need based loans and not available to everyone.
Unsubsidized loans begin to accrue interest as soon as they are paid to the student. The problem occurs as most people defer payments until after they graduate or stop attending. So you have taken out $20,000 in loans over 4 years but interest has been accruing since your first disbursement there by making your starting balance $20k plus 4 years of accrued interest.
Simple interest works the same way everywhere in the world. So if you have a $70,000 loan at 5%, then 70,000*.05 divided by 12 means that your loan is accruing about $292 in interest per month with that balance. On a standard repayment plan over 10 years, your payment would be $742 per month.
Now, many people decide to use an income-based repayment plan. So if you choose to go on income-based repayment which sets your payback according to your monthly income, and you have a low income where your monthly payment is $350 per month, then you are only going to be reducing the balance by $60 per month. If you make a payment 15 days late, then instead of $292 in interest, you accrue $440 in interest which means that you didn’t even pay off any of the balance this month.
So, it’s a combination of choose repayment plans that don’t actually reduce the principal balance of the loan by any meaningful amount, and it’s often combined being disorganized with paying back your debt obligations.
Student loans are unsecured debt, so unless your loans are direct federal loans which have very low interest rates, interest rates on student loans are often pretty high. And if your payment plan is such that your minimum monthly payments are lower than the interest accumulating on the debt, then you can make payments on the debt for years and not make any progress paying it off. This is why people should, as best they can, avoid using private student loans and attend in-state public universities. The only reason you should ever attend a private university or an out-of-state public institution is if you have enough financial aid that it’s financially comparable to in-state public.
It works like any other debt:
– you take out money
– it gets charged interest
– you pay it back
– on student loans if you can’t make payments for xyz reason you can do partial
This last point is important because it leads to compound interest
If you fall below the minimum payment on your student loans, the accruing interest, known as compound interest, can cause the total debt to grow.
Interest. Many loan repayment plans put most of your payment toward the interest charged, especially in the beginning when the principal is highest, so the actual loan balance decreases very little.
Add in income-contingent repayment plans and forbearance periods, and the interest charged could keep the balance quite high despite regular payment.
On the plus side, at 23 years, they’re quickly approaching the point at which federal loans would be discharged automatically. If those were private loans, however, they could be on the hook for the rest of their lives.
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