What is the Cost of Student Loans?

Student loans can end up costing hundreds of thousand dollars by the time they are paid off. The expense is due in part to the high cost of education and due to high interest rates. The principal loan amount will be very high for persons who elect to attend a 4-year university. Further, living costs during the time an individual attends school can result in tens of thousands of credit card or personal debt. Beyond this principal, though, interest rates are the number one factor driving up the cost of student loans.

Interest Example

Consider an example of interest rates applied to college tuition. If you take $10,000 of loans in a given year, you will owe far more than $10,000. If you are quoted an interest rate of 5% over 36 months, your actual financing cost will be $789.52 as the interest compounds. Instead of paying the $277 per month you think you will need to pay, you will have to pay $299 a month in order to pay the loan off in time.

Interest Charged during College Years

Some payment plans will allow you to avoid making payments while you are still a student. However, this does not mean your loans are stagnant. The expense of interest is multiplied by the fact interest is still being charged on your loans while you attend school. During the years you attend school, your principal loan amount will be growing if you are not at least making interest payments on the sum you owe. Some students will not have the option to work while attending college, meaning they cannot avoid this additional expense. These types of loans are called unsubsidized loans and are prevalent in the student loan marketplace.

Interest Charged during Grace Periods

Many students elect grace periods upon graduation. This allows them to seek a stable income prior to beginning to repay loans. Lenders allow debtors to have this extra time and continue to charge interest on the loan during that time period. Because you are not paying down your principal in any way, the interest is growing on your principal and previous interest, compounding each month you do not pay down your loans. The result is a much higher loan than the one you expected when you accepted the financing.

Payment Plans Prolong Process

Today, there are many payment plans to help students afford loan debts early in their careers. These plans allow for borrowers to repay loans on a graduated or income-contingent scale. This means they are making only minuscule payments when they have a small salary, and the payments will grow as the borrower's salary grows. While this seems ideal to many borrowers, they fail to note the fact they are not actually paying down their principal debt with these small payments early on. Most of these small payments are paying interest only, meaning the actual debt is not being reduced, and the process is prolonged as the cost of financing continues to rise.

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