How can people make payments for 20 years on school loans and barely make a dent in the principal? How are those loans different than a mortgage?
In: Economics
The other thing that happens and that people don’t seem to grasp is something called “negative amortization”. If your minimum payment isn’t enough to pay the outstanding interest that month then the unpaid interest is *added* to the loan principal… and *that* starts accruing interest as well! It’s like compound interest in reverse. Many people on income-based payment plans or deferral programs don’t seem to grasp this. That’s how we get crazy-ass stories of people paying on their loans for 20 years and still owing much more than the original balance.
Most every other loan product that consumers deal with either are completely amortizing (e.g. a mortgage that calculates the payments so you’re completely paid off over 15/30 years) or in the case of revolving lines of credit the minimum payment is calculated to at *least* cover all of the outstanding interest. They don’t even know that negative amortization is a thing until it bites them in the ass like this…
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