The day I make my last student loan payment is the day I will be free. But before making that last payment, it’s a good idea to make a plan to get out of debt. This is a lot easier if you do your homework from the beginning and know what you are getting into.
Student loans are a major responsibility, but there is one big mistake that a lot of people make once they have taken them out:
Starting to pay the loans back after their grace period ends.
The entire time you are in college, your unsubsidized federal loans and your private student loans accrue interest. Once you graduate from college, your new “principal” loan balance in calculated.
What does this mean?
It means that all of the interest your loans accrued while you were in college gets added to the actual amount you borrowed. This new total becomes your principal balance on the loan. Still confused? Here is an example:
Let’s say I borrowed $45,000 of student loans throughout college at a pretty low interest rate of around 4%. Since I didn’t pay anything towards my loans while in school, I accrued about $7200 in interest alone over those 4 years. Once my 6 month grace period (before you have to start making payments) was over after college, that entire amount was tacked onto my principal balance. Yes, this is a true story.
Here is a snippet from my last student loan statement before the grace period ended:
Here is what the statement looked like after the grace period ended:
You can see they added the interest to the principal row. Not only was I accruing interest on the $45,000 I had borrowed, I was now also accumulating interest on the INTEREST that had already accrued! That’s an additional $25 of interest accruing every month that I now had to pay. Just to put into perspective the extra money and hassle this caused, if I paid the minimum payment of $267 every month, instead of paying off my loan in September 2034, the loan wouldn’t be paid off until March 2040! How is this legal?!
Six years is what that mistake costed me. If I had just paid the interest off each month, about $130, I could have saved myself 6 years of loans payments and about $11,000 in interest.
Paying interest on top of the interest you have already accrued is not smart, especially for a recent college graduate. Make sure you pay off the interest before your grace period ends. You can spread the word about this anomaly by sharing the article with friends.