‘Tis the season for spooky movies and scary stories, but some student loan borrowers need only look at their debt balances for a true fright.
Maybe you have your debt under control and you’re making your monthly payments on time. It can feel like your debt’s not that big of a deal because you’re handling it.
But that doesn’t mean your debt isn’t costing you frightful sums. In fact, you’re likely paying hundreds of dollars a month or thousands of dollars a year toward interest alone.
Want to find out whether your debt is truly ghastly? Here are some key numbers you can look at to put your balances in perspective.
1. The total interest you’ll pay
Debt, by definition, makes everything more expensive through the interest charged on borrowed money. The true costs of debt can go unnoticed, but it adds up and drains important financial resources over the life of your loan.
Student loans, for instance, make college significantly more expensive than just the upfront costs. The average student loan balance for a 2016 graduate is $37,172, which likely already includes some interest charges from unsubsidized loans.
But in the course of a 10-year repayment plan with 6% interest, the total interest will add up to $12,350 — a 33 percent increase from the initial $37,172 balance. That means the typical college student’s education costs end up being a third higher when they use student loans to pay.
Use the calculator below to find out the total interest you’ll pay on your own student loans or other debt, and see how much prepaying can save you.
2. Your monthly interest cost
In addition to the total interest you pay, consider how much your debt is costing you each month — not just the monthly payment you make, but how much you’re charged in interest. This is a cost that could be avoided by paying debts off.
In the case of the average $37,172 student debt, for instance, a borrower can expect monthly payments of $413. But when repayment begins, nearly half of that, $186, goes toward interest alone. This amount will lower as the balance slowly ticks down, but the fact remains that simply having the debt is adding $186 to your monthly costs.
The amount of monthly interest accrued is even scarier for high-interest debts, like credit card balances. The average credit card balance is $6,662 per cardholder. With an interest rate of 20%, this debt costs you $261 a month, or $3,135 a year.
Want to know how much your debt is costing you? Here’s a formula to use: Divide your interest rate by 100 (20% for instance, will be 0.2). Then divide that by 12 (0.2 becomes 0.016). That is your monthly interest rate — multiply it by your balance and you’ll have the monthly interest cost of your debt.
3. The opportunity costs of your debts
Opportunity cost is an economic principle that acknowledges that when a person makes a decision, they are saying “no” to other opportunities. These missed opportunities are part of the costs of the decisions we make.
If you have student loans, you’ve dealt with opportunity costs in the past. As a student, you faced the upfront costs of attending college. But there was also the opportunity cost of devoting time to your studies instead of working and earning money.
Your current debt also incurs opportunities costs right now. Instead of getting to decide how to use all of your money, you have to make payments to lenders. You can also miss out on important opportunities to grow your wealth, like saving more for retirement.
Take, for example, the $413 monthly payment on that average 2016 graduate’s debt. If these same graduates could put that $413 into a retirement account instead of toward debt, they’d save just under $5,000 a year.
At the end of ten years, the balance of this account would be about $69,551 (assuming an average annual return of 6.5%), with more than $19,000 of earned interest. Those ten years of compounding returns on their investments is not something they’ll ever get back.
This means that on top of the $12,350 in student loan interest they’ll pay, there’s an additional opportunity cost of $19,000 toward retirement savings.
To see what your monthly payments would add up to if used for retirement savings, use the calculator below.
4. Your credit score
Maybe you have a scary-low credit score. Maybe just the idea of your credit score is so scary you haven’t been able to bring yourself to check it recently.
A credit score is how a lender judges your debt management, and it can say a lot about how you handle loans and credit. A poor credit score, around 650 or below, is a sign that your debts are a problem. Even scores between 650 and 700 can mean there’s room for improvements.
Consider how you got bad credit. The most common mistake that leads to poor credit is making late payments or missing payments. It can also be a sign of other potential issues, like a high credit card balance that’s close to your limit.
Not only does a bad credit score prove you’re not managing debt well, it can stick around to haunt you. Lenders will be less likely to approve you for loans you need, like a car loan or mortgage. If you are approved, you’ll get higher interest rates that will make these new debts cost more.
If your debts don’t seem that frightening, take a second look. What you see might be enough to scare you straight, and motivate you to pay debts down faster.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Variable APR||Eligible Degrees|
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.97% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate|
|2.57% – 6.97%1||Undergrad & Graduate|
|2.51% – 8.09%4||Undergrad & Graduate|
|3.02% – 6.44%2||Undergrad & Graduate|
|2.50% – 7.24%5||Undergrad & Graduate|
|2.79% – 8.39%6||Undergrad & Graduate|