In the year 2017 Americans saw the federal student debt rise to $1.48 trillion, surpassing credit card debt. Each of the 44 million borrowers were estimated to have graduated with $37,142 in student debt. Once graduated, Americans have to face the task of repaying these loans; a task that can last well into their forties. More borrowers are looking for ways to calculate savings by making extra payments. With online calculators, a lot of the guesswork is now removed for you and can quickly give you answers to your questions whether it is the remaining loan balance or an amortization schedule. If you are considering repaying your loan early, here are some things you should think about when making the decision.
Understand Your Repayments
Well, it is important you understand how repayments on your student loans are calculated. In college, you have access to both federal and private loans. Private loans generally carry a higher interest rate, ranging from 3.35 percent to 12.66 percent. Of course, these rates vary according to the student, bank/lender, and the risks. Federal loans, on the other hand, are issued by the Department of Education and carry a standard rate of interest for everyone. Repayments for private loans can vary and you can set a term of up to 20 years which means lower monthly payments but more interest paid overall.
When looking to calculate how much your monthly repayments are going to be, you may use this online loan calculator. You begin with inputting the amount you have borrowed. If you are not sure of the final amount, you can access this National Loan Data System. For private loans, you can get this amount from your credit report.
Next is your interest rate, which you can get from your lender or federal loan adviser. Finally, you would need to input the term time. Most students on federal loans are assigned the standard repayment term of 10 years. However, many are not aware that they can change this once they have begun repayments. In cities where students have high monthly payments, this is a very useful piece of information. Alternatives include switching to an income-driven plan or an extended repayment plan of up to 25 years.
The calculator will then give you different results including your monthly repayment, which is the minimum required on your loan each month. It also tells you the total interest you will be paying over the lifetime of the loan. Finally, it also tells you the total principal paid, the amount you initially borrowed. So now that you know the basics of calculating your repayments, what should you consider when thinking of repaying earlier?
Consider Your Interest Rate
Making voluntary payments on your student loan speeds up the process and it also means you will be paying less interest overall. However, one thing you should consider is the interest rate of your student loan.If your savings account offers a higher return, then your funds would be better off in a savings account accumulating for a big pay off or other financial obligations. Get to know the terms of your loan.
Evaluate Your Other Debts
If you have other debts, you may have to play a balancing act. It is best to repay those debts with the highest interest first. This is because that debt grows at a faster rate than the others. Credit cards are a good example of this. Credit cards can carry average APR rates of over 19 percent. Pretty heavy cost. Keep in mind interest is calculated on the total balance. So if your credit card balance is $2,500 interest would be calculated as $2,500 multiplied by 19 percent.
Get to Know Your Loan
Finally, get to know your loans. Federal student loans do not have a penalty fee for repaying earlier but private loans can. Check with your lender for their terms on additional payments. Federal loans can also be subsidized or unsubsidized. Unsubsidized federal loans begin accruing interest from the date you borrow so ideally, earlier payments on this would bring down the total interest accrued.
There are other steps for reducing your student loan burden other than extra payments including refinancing and consolidation. Be sure to do your research when considering this option and get the best terms suited to your personal circumstances. You can also opt to pay towards the principal not the interest.
By paying down the principal amount, you are essentially reducing the interest charges. If you are looking forward to the day you will be rid of your student debt and are considering early repayments, consider these points.
Lucy spent a little over 10 years working in the financial sector, mostly in a debt management capacity. She is now a free-lance writer.