Many people focus on paying down credit card debt because of the outrageously higher interest rates and how it can ruin your credit. While I agree that this should be your first focus when paying off debt, some people stop there and concede to the fact that they will be paying off their student loans for ten or more years.
Whether you racked up $1,000 or $100,000 in student loans, the interest you will pay on them can be surprising the first time you look at it.
When I first calculated how much interest I would have to pay on my student loans if I just paid the minimum amounts on them for the full term I was shocked. In that moment I vowed to pay as little in interest on my loans as possible. As it turned out I ended up saving enough to pay them off in full while the interest was in forbearance during my time in graduate school. I only had the motivation to do this though when I saw that I would have to pay thousands of dollars of interest on them if I didn’t make it a priority. Let’s jump right into the scary part.
Let’s say you have $20,000 in student loans when you graduate college and the term on your loans is 10 years long. If you have a cumulative interest rate of 6.8% (the highest percent I had on the majority of my loans) you will end up paying $7,619.20 in interest. That means for borrowing $20,000 you will be paying the federal government or bank $27,619.20! That is seven and half grand that you could have put towards retirement, other debt, a down payment on a house or a wedding! When I first realized this I changed my game plan for paying off my loans.
Calculate Your Own Interest
Okay, here comes some begging and a demand on my part, but this is really important. Please, please, please! Take five minutes right now to figure out how much you will be paying on student loan interest if you don’t accelerate your payments at all. All you need to do this is your remaining loan balance and the interest rates of them.
Use some of the many calculators you can find online to determine how much you pay in interest over time. If you have multiple loans with different interest rates use this calculator to figure out your cumulative interest rate if you consolidated them. Once you figure out how much you can afford to put towards them each month, use this calculator to determine how fast you can get them paid off.
Prioritize Paying Off Debt
Like I mentioned in my pillar article discussing debt you will want to decide on how you want to tackle your loans. Paying off your debt that has the highest interest is the way to get the best return on your investment because you will be paying less in interest in the long haul. Some people like to pay off their debt that has the lowest balance first (while still paying minimums on the others) and then snowball those payments into the next lowest amount. This tactic was made popular by Dave Ramsey. While this tactic may not have the best financial return, it can help you build the momentum to pay off the debt.
Final Important Step
The best way to get your debt paid off is to automate your payments. Don’t just stop at automating your minimum payments though, set up your extra payments to be automatic also. By setting this part up you will take the mental part out of equation and you will be much more likely to reach your goal.
Do the calculation on your student loans and see what you will be paying in interest if you don’t accelerate your payments. If there is just one article I have written so far that a current college student or recent graduate should read, it is this one. Please retweet, share on Facebook or email this to someone you know that can benefit from going through this exercise.