© Copyright 2006 Mitchell & Mitchell,
LLC, all rights reserved.
WHY DO I OWE TWICE AS MUCH AS I BORROWED ON MY STUDENT LOANS?
Welcome to the magic of compounding. You’ve heard about it before. If you invest your money at 10% interest, and you never add to it, your balance will double in 7.2 years.
This is the rule of 72. Well guess what? Somebody invested their money in you, and if
you never paid it back …
If you’ve ever missed a payment, there may have been a late fee assessed.
During periods of deferment, the interest on unsubsidized loans accrues. It adds up. Periodically, that accrued interest is added to the loan balance – capitalized. From then
on, the lender is able to charge interest on the interest, just as in the first example you earned interest on your interest.
During periods of forbearance, the interest on unsubsidized and subsidized loans accrues the same way and is capitalized the same way. Generally, interest is capitalized quarterly (every three months) and at the end of the forbearance or deferment.
Interest rates on student loans are currently variable, tied to the 91-day T-Bill on July 1 each year. Sometimes the rates are low, and sometimes they are high. Interest rates on older consolidated loans are fixed rates, but until recently they haven’t been particularly low. When you compound interest due to forbearance or deferment, and when you add in late penalties, the balance can grow at an alarming rate.
For examples of how quickly your balance can grow, read Chapter Nine of “Surviving Your Student Loans”.
Why Do I Owe Twice As Much As I Borrowed
On My Student Loans?
Student Loan Topics:
Master Promissory
Note, Student Loan Deferment, Student Loan Forbearance, Student Loan Consolidation, Student Loan Discharge, Student
Loan Grace Period, Subsidized Student Loans, Unsubsidized
Student Loans, Stafford Student Loans, Perkins Student Loans, Direct Student Loans, PLUS Student Loans, William G. Ford
Student Loans, Student Loan Delinquency, Student Loan
Default, Student Loan Payment Options, Student Loan Case
Studies, Student Loan Management, Additional Reading Relating
To Student Loans, How Do I Get A Student Loan, How Do I Confirm
the Status of my Student Loans, Why Do I Owe Twice As Much As I Borrowed
On My Student Loans, Pending Changes Affecting Student Loans, Bankruptcy and Student Loans, Student Loans And Your Credit
Report, Student Loans, Gifts.
