I’m a senior in HS right now. My mom keeps pressuring me to go to college but I can’t bring myself to go without knowing how I’m going to pay it off. She told me she’s been paying $500/mo since she graduated on $60k, and yet she owes $62k. Can someone explain to me how the interest works in a way that makes that possible? Is it just a super high rate?
How does the interest on student loans work?
byu/unknown_user162 inStudentLoans
Posted by unknown_user162
9 Comments
The same way interest on anything else works. An annual rate is divided by 365, and applied to the daily loan balance.
If your mom has been paying $500/mo., that’s $6K per year. Unlikely, but possible, that her interest rate is greater than 10%. More likely that she missed some payments, or was in a forbearance where payments weren’t due, but interest kept accruing.
Bottom line — loan balances go up when the amount paid, whether $0 or $500 per month, is less than the interest accrued for the month. Period, end of story. Not complicated.
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It’s simple interest.
For the sake of simplicity, let’s use round numbers. If you borrow $100,000 at a 10% interest rate, every year, $10,000 of interest will accrue. 10% was chosen due to it being easy to understand – it would be considered a higher than normal rate – if I’m not mistaken, the average rate is around 6 to 7% right now for federal loans.
If these are federal loans, you can pay them off with a standard repayment plan of 10 years. Using the $100,000 at 10% as an example, your payment would be around $1300 a month. At the end of 10 years, the loan will be paid off.
Many people borrow more than their income can support on the standard repayment plan, and choose income based repayment instead. So using the same loan as an example, if you made $500 in payment payments on an income based repayment plan, that means that your loan balance would continue to go up $800 each month (at least, until RAP starts in mid-2026 and you switch to it, as it subsidizes some interest). Ideally your income would improve over time to the point that you could pay your loans off, but it’s not uncommon to be totally underwater on them.
So a lot of the time what you end up seeing is people who are making monthly payments with balances that grow. Generally the end goal for these people is having their loans forgiven after a certain period of time depending on the repayment plan they are on. Although you do have to pay taxes on that forgiven amount unless you’re doing public service loan forgiveness’s 10 year income based plan.
Although if you are doing a private loans, there is no income based repayment plan, so you need to be absolutely sure that you can afford your note. It’s generally recommended to stay as far away from private student loans as possible.
Shoutouts to you for even being this forward-thinking while still in high school. I can assure you that many of us had no real clue what we were getting ourselves into when taking out our student loans.
Another consideration is capitalized interest. I learned about that the hard way. After undergrad I went into a grad program and had my loans on forbearance (didn’t qualify for deferment). I didn’t need to pay but they still accrued interest. At the end of forbearance that accrued interest was added to the principal loan amount, so now accruing interest on that interest. I have a good job now and am almost paid off, so it made sense for me at the time, but it’s definitely something to consider.
Just some unsolicited advice since you’re looking into college. Community college is a great place to start. Benefits: low cost, small class sizes, and a great way to get your gen ed classes out of the way. It’s here where you can explore your career interests.
Heya Op,
Apparently it worries me as well if your mom has a college degree and her financial literacy is poor.
First thing first:
*Research the school you’re planning to apply or trying to get accepted into.
*Know how to apply for federal loans. The difference between a subsidized loan vs unsubsidized loan.
*Do not… I repeat by all means. Do not dive until getting private loans unless absolutely no other option!
Do math and work on paying off unsubsidized loans during school if able.
Federal loans qualify for programs that’ll assist you. Private loans don’t! They only could be refinanced if approved.
If your mom needs help she could also reach out to lenders for financial difficulties or see if her job has any pslf programs that could help her. It’s very likely that it’s her private loans accruing high interest.
How long has she had that loan for? That $500 isn’t going to cut it. It needs to be go up. Like $1,250.
College is great if you have an idea of what you want to do. High school generally prepares you for college, and college funnels you toward a focus or career. The student loans only make sense if you are heading towards a constellation of jobs that interest you. Example: if you want to do healthcare, explore career options and come up with a plan in case option A doesn’t work out. Example: Plan A MD, plan B nurse, plan C technician. If you are on track, the loans shouldn’t freak you out.
In undergrad, your federal subsidized loans won’t accrue interest until you graduate. The rate will change each year, but hopefully not significantly. Do some simple math to figure out how much you will owe. Try to work and cut costs.
Grad school loans or federal unsubsidized are different and generally accrue interest starting the day you take them out.
Private loans vary, and the rate will be strongly impacted based on if you have a co-signer.
Message me or reply here if you are interested in a field and I can try to give you an overview or some direction based on my experience with friends and family. I’m in healthcare.
Like other people here have said, interest works like normal except:
For federal backed loans, there’s 2 types. Subsidized do not accrue interest while in school. Unsubsidized does. The amount you can get of each depends on your parents’ incomes.
Beware of private loans. They often have worse terms, but unlike the federal backed loans they may be able to be discharged in bankruptcy. It sounds like your mother may have a lot of unsubsidized and private loans.