One of the biggest reasons I started paying extra on my student loans was because I realized how much money was going to interest.
When I started paying off my student loans, my minimum payment was $350. About half of those initial payments were going to interest. That means $175 a month – or 10% of my take-home pay at that time – was being flushed down the toilet.
Interest is the money you pay to the bank for letting them lend you money. Interest is how banks make money. The interest rate you have depends on the kind of loan you have, how trustworthy of a borrower you are and how well the economy is doing.
My interest rate was 6.8%, which is double the amount some people pay for their mortgages. Since my loan was unsubsidized, the interest capitalized while I was in school and not making payments.
Like I said, paying that much interest made me mad. Mad enough that I cut expenses and started putting any extra money toward my loans. $175 a month could pay for my utilities, internet and Netflix bills. With money left over.
Here’s a brief list of what $175 could pay for:
- Almost two week’s worth of groceries for my husband and myself
- Four vet appointments for my dog
- Two wedding dresses
- Car insurance for a month
Most of us only think about how much we borrowed when we think about the cost of our loans, but we should also include the interest. If you have information about your loan handy, use this calculator to figure out the total cost of your loan.
That’s the second number that will likely surprise you. I remember if I had paid my loans off in 10 years instead of three, I would have paid more than $10,000 total in interest. My loan would have cost me almost $40,000 instead of $28,000.
If you want to see what $10,000 could get you, here’s another list:
- A down payment for a house
- Five trips to Europe
- Rent for a year
- Three month’s worth of insurance premiums
- An emergency fund
Pretty scary, huh? It’s those numbers that scared me when I started paying off my student loans. I didn’t write this blog post to scare you, I wrote it so you can understand how much your student loan actually costs you. It’s easy to make the monthly payment and forget about it.
Once you understand how much interest you’re paying, you can’t go back. You’ll start to look at your money differently once you realize that making different choices can save you thousands in the long run.
That’s what happened to me. I spent money recklessly before I started paying off my student loans. But afterwards, I saw the power that a dollar could have. You add up enough of them and they can make a big difference in your life.
Figure out how much you’re paying in interest and if you want, leave a note in the comments. If you get really mad, feel free to sign up for my debt payoff course here. It will probably cost less than what you pay in interest every month!
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With such a high interest rate, that’s a very worthwhile strategy. We only have two items of debt right now, our mortgage and one small student loan. Both are under 3.25% so our urgency is not that great, but I can guarantee if either were anywhere near your rate, our approach would be dramatically different and very much in line with what you’re doing.
Yeah since it was close to 7%, I didn’t want to hold it longer than I had to. My mom had student loans at 3% and I know they paid them off in 10 years and invested their extra money instead.
Wow, that’s a pretty high interest rate for student loans. Pay that sucker off! Don’t let them get nearly 50% of your original loan amount just because they can. It may be tough to give up the money for the short-term but having ten thousand extra dollars will be well worth it.
Totally agree on the interest! Once I realized how much I way paying per year, I started aggressively paying off my loans. I am purposely keeping a small balance on one of my student loans for credit history purposes (it’s my longest open account and helps keep the average of age of my accounts higher which is good for my credit score). It’s currently at 4.25% interest rate which isn’t so bad. Occasionally, the interest rate drops to zero when I take a full semester worth of courses for my part-time grad school.
I also decided to pay my loans off in three years instead of 10 for the same reason. I finished grad school with $75,000 of debt, and if I had paid my loans off over 10 years, I would’ve paid nearly $100k. Spending that much on interest is insane!