Today I logged on to all of our accounts (checking, savings, etc.) and our loan servicer portal to check on our progress and saw a number I wasn’t expecting. Once my heartbeat slowed down a little, I realized that it was very close to what I had calculated last time I did this little exercise (about two weeks ago), except that I hadn’t accounted for interest.
In eighth grade compound interest seemed like complex interest – that is, the equation seemed like learning to speak a foreign language, I was always doing something wrong. Grad school didn’t improve my understanding, I had a vague comprehension of the interest accruing day-by-day and an accompanying fear that grew with it – how were we ever going to pay back the $29,000 we borrowed without living on rice and beans for the next ten years? By the way, this isn’t only true for graduate school loans, undergraduate unsubsidized or private loans also begin accruing interest from the moment they are disbursed. It’s very important to know what your interest rate and compounding schedule are to understand how much you will end up having to pay back.
Minus the Complexity
If I learned one thing in college and grad school, it was how to use my resources. So today, I decided to let a calculator designed for the job do the work for me and I ran a couple test cases. First, because we have now pushed our next payment due date out to sometime in 2025, I decided to run a little analysis on what would happen if we decided to stop all payments between now and when our next one is due.
Basically, we would owe $5,233, give or take a dollar, if we didn’t pay anything at all until our next payment is due in Summer 2025. That might sound not too bad, but when you are talking about big numbers, things get out of control really fast.
Paying Off Your Loan
As I’m sure you know, the money you borrow, in our case, $29,000 for grad school, is the principal when it comes to calculating repayment. This number, by itself, looked scary enough to me, but knowing that every day after it was disbursed it was accruing interest, that was motivation enough to get on a plan to pay it off.
“Normal” 10-Year Repayment Plan
In our case, had we taken the normal path to paying our loan back, it would have taken us 10 years at $331.14 per month. When you’re only making about $3,000 a month before insurance and taxes, that’s a big chunk of your income! If we had made 120 payments at $331.14 per payment, eventually our total would have been over $39,700.
It breaks down like this:
- $29,000 in principal (or 73% of payments made)
- $10,736.39 in interest (or 27% of payments made)
- Total Paid: $39,736.39
- $331.14 per month for 120 months
The good news is we took one of Dave’s many wise proverbs to heart: “Debt is normal; be weird.”
Our 22 Month Repayment Plan
What we’ve actually chosen to do is throw everything we’ve got at the loan, along with implementing some much better budgeting and financial planning principles.
With that in mind, our payment breakdown looks more like this:
- $29,000 in principal (or 94% of payments made)
- $1,876.67 in interest, give or take a little (or 6% of payments made)
- Total Paid: $30,876.67
- $1,403.48 (on average) per month for 22 months
That’s almost $9,000 we will have saved by spending 22 months living lean. Whether that $9,000 goes toward a down payment, an upgraded used car, children’s expenses, or even a great trip, that’s $9,000 I’m going to have a lot more fun spending on anything other than a loan.
So, hopefully, barring any other unexpected surprises, we will be officially done with our grad school loan next month. I hope the interest and repayment information above is helpful to you. If you’d like you can use the same calculator I did to figure out how much you’re saving by paying off your loan(s) faster. Thanks for following our journey – I’d love to hear about yours!