When I look back on the level of effort it took for me to acquire $170,000 of student loan debt, it’s quite frankly shocking at how easy it was. A ‘pre-entrance loan counseling’ online class, a couple of digital signatures, and like digital magic, the transaction was complete. What I continue to struggle with is the understanding that although it is easy to get into student loan debt, the path out is difficult. One of the key metrics in quantifying the difficulty of conquering student loan debt is to understand the impact interest has on the loan…I mean really understand the impact. Do you know how much interest accrues within each loan daily, weekly, or even yearly? Do you know how much of your payment is applied to interest vs. principal?
Here’s how to calculate your student loan interest, step by step.
We’ll use my current outstanding principal student loan balance of $154,793.48.
Step 1. List all of your individual student loans in excel
Some loan servicing providers like edfinancial organize individual student loans into ‘groups’ based on disbursement date. For example, group G above is actually two individual loans related to tuition for a fall semester at USC. Keep it simple, the excel file just needs 2 columns: interest rate, outstanding principal .
Step 2. Calculate the daily interest rate of each loan group
Continuing with group G, the annual interest rate for that loan group is 7.00% This means the $36,000 loan I received now has a balance of $38,520 365 days after the disbursement date as outlined below.
In step 2 we need to calculate the daily interest rate which is 7.00% / 365 . You can see in this example the daily interest rate on a 7.00% loan is .02% or 1/5 of one percent.
When we apply this to the $154,000 principal balance across my aggregate loan groups you can see my daily interest rate hovers between 0.014 and almost .020. This means that for every dollar I give to the US Department of Education almost 2 cents is allocated to interest. This doesn’t sound like alot, but with big numbers it’s huge! Keep reading.
Step 3. Multiple the daily interest rate by the outstanding balance
Here’s where the numbers get shocking. I can actually see how much interest my student loans accrue everyday by multiplying the daily interest rate by the outstanding balance (in this example the ‘outstanding principal’). The $154,793 principal balance accrues over $27 a day in interest alone!
Let that sync in, my first job in high school paid $5.75 hour (shoutout to mervyns #rip!).
Step 4. Multiply the daily interest amount by 30 days
This calculation will give you the approximate interest each loan group accrues in a 30 day window. My $154,000 of student loan debt will accrue approximately $815 of interest in 30 days.
When we wonder why our student loan amounts never go down in the beginning…this is it! Initial repayment plans have over 50% of the payment balance going towards interest. The only path to reducing the interest payment is by making additional payments to principal.
What about you?
The $27 daily interest and $815/monthly interest on my student loans is honestly mind numbing and at certain times doesn’t seem real. It’s insane to think that the amount of student loan interest I battle every month is more than the average monthly income of India, Vietnam and Thailand combined. For me it is the affirmation that the only way out of this trap is an aggressive payment schedule to be debt free by 2020.