The Trickery of Daily Compound Interest on Student Loans

In the world of education, as seniors are getting set to graduate from high school and figure out what they should do next, the importance of higher learning is lobbied to the masses. For most, they choose to head to college in the fall, with the recent numbers in the United States showing that about 66 percent of graduating high school seniors will go on to attend college the following school year. 

If we look at numbers and talk about college, the average student loan debt for college graduates in the United States is approximately $30,000. However, students have chosen to attend the pricey colleges and universities and graduate with more than $100,000 in debt. Suddenly, the possibility of living in your parents’ basement for years is quite real. 

Most students believe that they can quickly pay off these debts and also buy a house or do some city living at the same time. But it is not that simple. 

Differences Between Grants, Scholarships, and Student Loans

Here is a brief Economics 101 tutorial for those entering college after high school. Grants, scholarships, and student loans are not the same thing. 

• Grants are free money handed out to qualified students for one reason or another to help pay for college. They do not have to be repaid.
• Scholarships are offered by the colleges or various organizations and businesses. They do not have to be repaid either.
• Student loans have to be repaid with interest. If you hear someone saying you can take out student loans to pay for your whole college career, they are not overly concerned with your financial wellbeing. You will be in some serious debt.

Student Loans

There are two types of student loans you could be looking at, so make sure you know which one you are getting. 

• A simple interest loan is a process of calculating interest charges based on the principal only. For example, a monthly simple interest loan is calculated by considering three factors: daily interest rate, the principal of the loan, and the number of days between your loan payments.
• If your loan balance is, indeed, $30,000 after college, your daily interest rate on a simple interest loan could be approximately $3 a day. You would be paying more than $1,000 in interest for a simple interest loan for the year.
• Compound interest loans will cost you even more money. With this type of loan, you are paying interest on your interest. If your loan is compounding daily, that means instead of having an unwavering $30,000 loan balance, your new principal after one day would be $30,003. Then the following day, with a slightly higher new principal amount, you may have a new balance you owe of $30,006.50 or something similar.

What Does This Mean For You?

A $30,000 simple interest student loan at 6.8 percent will have you paying $358 a month until the loan is fully paid in about 11 years. Out of the $358 a month you are paying, $95 of it goes towards interest. This means that $263 of it is going to the principal amount. At the end of 11 years, you will have paid about $11,000 in interest. 

In contrast, the compounding daily interest loan calculator I used, which is extremely tough to find online even though many student loans are compounded daily, showed the amount of interest on a $30,000 student loan was about $13,000 for that same time period. 

Needless to say, if you start to fall behind on your student loan payments, this will be bad news either way, but it will be much worse with a loan that is compounding daily interest and adding it to your principal amount. 

The Goal Is to Stay Out of Debt and Prepare for the Future

Rather than just attending college and knowing you will have to take out thousands of dollars in student loans, put a plan in place that will keep the amount you owe back to a minimum. 

For instance, junior colleges are much less expensive, and you can generally pay those amounts off in full with a part-time job as you take the classes. Then when you transfer over to finish the final two years of college, check out the price tag at these schools. You could graduate with only $10,000 in student debt or less if you play your cards right and make wise choices.  

Or you could put your intention on a scholarship by earning the best grades and exam scores you can. iAchieve can help with this goal as we provide the best professional tutors, both online and in-person. By working together, we can assist in keeping your student loans to a manageable amount!

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