Today I made a $1527.32 payment towards my $170,000 student loan payment, bringing my total payoff amount to $168,946.40, see below.
Now before I geek out on the principal and interest, let’s think of some other fun ways I could have spent $1527.32.
1. 509 Quad Espressos Over Ice in a Venti Cup from Starbucks @ $3 a pop. 2. Fly my favorite hat to Italy on British Airways just like Bono. 3. Buy an early Early 19th Century American Iron Duke War Chest Antique Trunk (thanks Craigslist)
Ok, fun time over, let’s break down my August 2018 payment.
$1527.32 in details
Approximately 62% of the total payment went to principal, and 38% went to interest. I have 13 individual student loans grouped aggregated into 9 groups as outlined below. 7 of 9 groups are now in repayment status, while 2 are in grace. Grace period is a mandate for federally insured loans. It is the time between when you graduate and when loan repayment starts.
In my scenario, I will make additional payments totaling $5000-$7000 per month in the order defined column ‘Payoff Rank’. Shut up about interest rates and making mathematically informed decisions. If I followed math , I wouldn’t be in this situation. My purpose of paying off the debt smallest to largest is to create momentum and intentionality.
When you monitor loan payments using the principal loan balance or the ‘Loan Summary Page’ as defined on the Department of Education (or edfinancial.com)’s site, it’s a little misleading. The above chart indicates payoff amount is $165,999.46 but when I actually calculate the total amount owed, inclusive of interest, the payoff amount is $168,946.40.
If I were to write edfinancial a check today to pay my account in full, it would be for $168,946.40….but don’t worry, I definitely don’t have this type of cash laying around.
You might ask yourself, what’s the difference between $168K and $165K when you’re in this much debt? How about a 2004 Honda Civic…jerk.
Comparing Total Loan Balance
So when I compare total aggregate loan balance, including interest, from my prior month — the total net reduction is only $777.64. Comparing total loan reduction by group, you can see that group C,D,I actually went up in amount owed. Why?
Accrued interest in these loans were capitalized in the last 30 days. This is just a sophisticated way of the government kicking me in the nuts while i’m down. Accrued interest is the interest on the principal that been added to the principal. When interest is added to the principal, the new amount is (principal+interest). For example, the image below shows what happen interested in added to principal. This is called ‘capitalizing’ interest.
Your new amount owed goes up by $53. What’s more important is that interest now accrues on the the new principal amount — in this example $21,395.94. This is why some people make payments on student loans but the debt never goes down, the amount paid does not offset the accrued interest which is capitalized on the loan.
In my example, there was a net reduction of $777.64. This means I am paying more to principal than what accumulates in interest.
What is my daily interest rate?
If you do the math on this insanity, you will see that at $169,724 — interest accrues on my student loan at a rate of $27 a day, or $831 a month. That is f*cking crazy, and you can see how interest kills your student loan payments in this post.
This month I plan to make a remaining payment of $72.68, for a total $1600. It may not seem like much, but it’s part of a much larger 24 month pay off strategy listed below.
Paying off this crazy debt is possible. For the 44 million Americans who have over $1.5 trillion dollars of student loan debt, don’t give up. You can do it. Be intentional, be focused, live on less than what you earn and work hard. See you on the other side.