The Math Behind Paying off Your Student Loans
With over 44 million people in the United States carrying $1.5 trillion in student loan debt, paying off your student loans might seem like a daunting task. The good news is that once you understand the math behind paying off your student loans, you can be on your way to clearing your loan debt and getting on to new financial goals.
What goes into the math behind paying off your student loans? What kind of information do you need to know in order to make smart repayment choices? What is a realistic timeline for paying off those loans and are there loan forgiveness programs?
Gather Your Information
In order to ensure that your calculations are correct, figure out what the outstanding balance is, the interest rate, and the creditor for each of your student loans. This information will give you a complete picture of your student loan debt and the numbers you need to determine a plan of action.
Let's say you have three outstanding student loans:
- $10,000 at 4.5 percent interest
- $8,000 at 6 percent interest
- $5,000 at 9 percent interest
With these numbers in mind, you can use a calculator to figure out what your blended interest rate is. The blended rate on the above loans is 6 percent.
Looking at the Math
If we use the above numbers, your outstanding student loan balance is $23,000. By using a payoff calculator with your blended interest rate of 6 percent, here's how long it will take to pay these loans off and what it will cost each month to hit that goal:
- Pay off in five years: This will cost you $445/month, and you'll end up paying a total of $3,679 in interest
- Pay off in 10 years: This will cost you $255/month, and you'll end up paying a total of $7,642 in interest
- Pay off in 15 years: This will cost you $194/month, and you'll end up paying a total of $11,936 in interest
You could refinance these loans to an overall lower interest rate to make one simple monthly payment. Note that the interest rate below is hypothetical; yours will depend on your creditworthiness.
If you refinance your $23,000 to a 3.89 percent interest rate, here's how the numbers change:
- Pay off in five years: This will cost you $422/month, and you'll end up paying a total of $2,346 in interest ($1,333 saved in interest)
- Pay off in 10 years: This will cost you $232/month, and you'll end up paying a total of $4,800 in interest ($2,842 saved in interest)
- Pay off in 15 years: This will cost you $169/month, and you'll end up paying a total of $7,395 in interest ($4,541 saved in interest)
While realistic goals for paying off student loans will vary from person to person, you can use the calculators to see what a reasonable time frame looks like for your debt and current income levels. Applying lump sum payments like bonuses and raises can also help accelerate payoff.
Student Loan Forgiveness Programs
Depending on your field of study and the balance of your student loans, you might consider exploring student loan forgiveness programs.
These programs are eligible to borrowers with federal student loans. National programs forgive student loan debt up to a certain threshold if you work in specific fields and geographical areas for a designated period. Forty-eight states have student loan forgiveness programs. Do some research to see if you're eligible, and understand the commitment and total amount of forgiveness you could receive for participating.
Consider the various ways for paying off your student loans. Whichever path you choose, math will be your guiding light and help you determine the best method for your student loan balances.