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How Student Loans Work

Basic Concept Behind Student Loans And Payment Calculation


Here is a quick overview of student loans. I’m not going to go over all the different loans out there, the variable rates, private vs federal loans etc. I suppose this is an article about how MY student loans are structured. Here is a screenshot from loan #1. I have 2 separate loans with the same company at the same interest rate. Loan #1 was for an original amount of $71,290.52 and loan #2 was for $44,928.67. In total I started out with $116,219.19. These are consolidated loans of my federal debt, locked in at 3.00% for 20 years. The company gives you 0.25% discount if you set up and automatic payment.


Yes, very confusing… that’s how these companies maintain control, by keeping you just confused enough for you to not feel in control.



Started Out With $116k

The loans were initiated on 2/2006 and my first payment was due 4/2008. During this time they accumulated interest at a rate of 3% per day. So, at $116,219 loan balance that was $9.55/day of interest that was added to my balance. So by 4/2008 I had a balance of $123,419 ($116,219 + 754 days x $9.55). When my minimum payments did start back in 3/2009 I was billed $318/mo which meant that my principal was still going up. I didn’t know this back then but hey, live and learn! You can see that I set up my payments to be at $400/mo but my minimum due at the time was $318.

In 2008 my principal was just going up.



Down To $43k…

So where am I at now? Today, 6/28/2015 my balance is at $43,505.01. I decided that I wanted the balance to be zero before the end of 2015. I made this decision on 5/1/2015 and since then I’ve been using every disposable dollar to pay down my debt. I’m only putting money towards my 401(k) and paying my personal expenses.

Finally making a dent in the principal! You can see that a portion of each payment will go towards the daily accrued interest and the other portion goes to pay down the principal.


Now that my principal is down to $43,505 my daily accrued interest is only $3.27. Which means if I didn’t make a payment for 10 days my principal would go up to $43,537.70. Once I make my payment of let’s say $1,000 I will see that $32.70 was applied to interest and $967.30 was applied to principal. This would put my new principal at somewhere around $42,540 (one day of accrued interest since it takes a day for the payment to be applied).

I hope this helps you understand how student loans work. When they are refinanced they are traditionally set for a 10-year repayment. In my case this was a 20-year repayment program. I encourage you to spend a few minutes every week going through your lender’s website. Click on every link you have, post questions online about things you don’t understand. Email the company and ask them any question that comes to mind. Understand your loan terms, your repayment time frame, how much is going towards your principal, how much towards your interest etc.

If you plan on understanding your SL’s better and pay them off faster then consider…

  • going through your lender’s website with a fine toothed comb
  • figure out what your actual payoff date is and back calculate how much sooner you could pay it off with extra payments
  • make a spread sheet of your payments and your estimated payoff date and play around with the numbers
  • consider not contributing to your savings for a while until you make a sizable dent in your loan balance

One reply on “How Student Loans Work”

I have a simple spreadsheet that I use to play with the dates and amounts. By changing how much I pay extra towards my debt I can see how it affects my payoff dates. If you are interested in this message me and I’ll send you a copy.

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