At Resolvly LLC, we see plenty of debt caused by student loans. Often, the reason a person's debt has gotten out of hand is that they don't understand how the loan works - or how they're accruing so much interest it becomes difficult to pay the debt down. Here's a rundown on some of the most misunderstood concepts about how student loan interest works.
Federal vs. Private Loans?
Federal loans are given by the government. They have a fixed interest rate that is declared by Congress each year. Private loans are from individual lenders. They can have either a fixed or variable interest rate. Variable interest rates are considered riskier to borrowers, as interest rates can grow higher and higher over time.
Interest: Federal Loans
Note: To find the interest of a private loan, you will need to use a loan calculator, as private student loan rates can vary.
The formula used for determining the interest you are accruing on a federal student loan is as follows: Principal (the original loan amount) x Interest Rate / 365.
For example, if you had a $6,000 loan at a 5% interest rate: $6,000 x 5% / 365 = 0.82. This means you are accruing $0.82 per day on your loan in interest.
When Does Interest Start?
When you start getting charged interest on your federal student loans can vary, and a big part of this depends on whether you have a subsidized or unsubsidized loan.
If you are able to demonstrate need, the government might "subsidize" your student loan. This means that the government pays only the interest on your loan while you are in school. However, the day you graduate, the interest starts accruing normally, and it becomes your responsibility. (For parents helping their children by taking out student loans, there is no subsidized loan option.)
Unsubsidized loans accrue interest while you are in school, starting when the loan is disbursed. You will graduate owing the loan amount plus the interest accrued.
In both cases, payments are not due while you are still in school, as it is unlikely that full-time students will be making a significant enough income to be making regular student loan payments.
Consequences of Missed Payments
If you are late or only make a partial payment, it is considered a "missed payment" and will show up on your credit report and possibly cause you to default on your loans.
If this happens, the unpaid, accrued interest becomes part of your principal amount. That higher principal amount can then start accruing interest itself, which means you're not only paying more for the loan, but you're also paying more money on the interest of the loan as well.
How to "Pay Down Your Loan" Faster
This is where the term "applied" comes in. If your payments are "applied" to your loan, then that money is going directly toward the loan, not the interest or any associated fees. However, when you make a payment on a loan, your money goes first toward interest and other associated fees.
Like digging through "layers," you need to have enough money to get through the interest and fees layers to reach the actual loan layer and pay it off. This is why many people choose to pay more than the required amount for each monthly payment. The faster you can chip away at the actual loan (the "principal" loan), the less interest you will accrue, making it easier to reach the principal loan layer with the next payment.
Resolvly Can Help If Debt Becomes Unmanageable
Student debt and its interest can be tricky to manage. If your private student loan debt has become unmanageable, Resolvly has the tools to help you resolve your debt and can assist you in your journey toward sustained financial freedom.
Resolvly is a Florida Bar-approved lawyer referral service that helps clients nationwide connect with consumer protection attorneys that specialize in debt resolution. We find the right legal-based solution to reduce or dismiss unsecured debt. Resolvly works with a network of attorneys that will protect and enforce their clients' legal rights and can assist with credit card debt, personal loans, private student loans, business debt, medical bills, and vehicle repossessions.