Are you applying for a student loan for the first time?
Then you should know that the way loans are calculated will differ depending on the type of loan you take. Because of that, you should learn how to calculate student loans to keep your finances in check.
Here’s everything you need to understand about how student loans calculators work and ways you can prevent yourself from getting buried in debt.
To calculate your student loan, you’ll need to know three things:
Knowing these three numbers will inform you of how much you’re supposed to pay every month. Let’s use an example:
You borrowed $10,000 with an interest rate of 6% and a loan term of 20 years. Let us walk you through how to compute your monthly loan payment using this scenario.
Student loans are classified as amortization loans. That means you’re paying the principal amount and interest at the same time over a set period.
The formula for calculating an amortized loan is:
Monthly Payment = Loan Amount ÷ { [ ( 1 + Interest Rate ) ^Payment Period ] – 1 } ÷ [ Interest Rate ( 1 + Interest Rate ) ^Payment Period ]
Let’s substitute the values with the figures from our example:
Here’s the breakdown of the calculation using our example.
Monthly Payment = $10,000 ÷ { [ ( 1 + 0.005 ) ^240 ] – 1 } ÷ [ 0.005 ( 1 + 0.005 ) ^240 ]
Monthly Payment = $10,000 ÷ { [ ( 1.005 ) ^240 ] – 1 } ÷ [ 0.005 ( 1 + 0.005 ) ^240 ]
Monthly Payment = $10,000 ÷ { 3.3102 – 1 } ÷ [ 0.005 ( 1 + 0.005 ) ^240 ]
Monthly Payment = $10,000 ÷ { 2.3102 } ÷ [ 0.005 ( 1 + 0.005 ) ^240 ]
Monthly Payment = $10,000 ÷ { 2.3102 } ÷ [ 0.005 ( 1.005 ) ^240 ]
Monthly Payment = $10,000 ÷ { 2.3102 } ÷ [ 0.005 ( 3.3102 ) ]
Monthly Payment = $10,000 ÷ { 2.3102 } ÷ [ 0.0165 ]
Monthly Payment = $10,000 ÷ 140.0121
Monthly Payment = $71.42
So if you took a loan of $10,000 with an annual interest rate of 6% and a loan term of 20 years, you’ll pay roughly $71 per month.
If you multiply $71 by 240 months, you’ll get $17,040 — this tells your total interest would be $7,040.
It will all depend on how much you can pay regularly. It’s not the same for everyone as it will be based on the terms of your loan as well as if you’re able to pay it consistently.
Just know that there are ways to pay off your student loans faster.
The most obvious way would be to shorten your loan term. However, this isn’t a realistic approach for everyone. But you can explore other options.
If you can afford to, you should pay more than the minimum amount per month. This practice is allowed by most student loan services.
To be sure, you can contact your loan provider and ask that any excess payment you make go toward the current balance as some will simply take the excess and deduct it from the following month’s bill.
Refinancing student loans or consolidating your debt will make it easier to make extra payments. These will be discussed later on.
Not everyone can afford to make extra payments though. If you’re barely able to make payments as it is right now, there is another solution.
You can lower your monthly payments but still pay the same amount as you do today. This would essentially be the same as making extra payments — only you’re making an amount that you’re already comfortable with.
There are several ways to do this:
If you’re eligible for tax refunds, you can allocate that toward paying off part of your student loan debt. The US government can take an income tax refund if an individual is in default.
Of course, the best way to pay student loans faster is by finding the right private student loan.
Before applying for a student loan, compare all of the available plans to see if there’s an alternative that might be better for you.
Look for a loan that has a low-interest rate and flexible loan terms.
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