Understanding 10-Year Vs 30-Year Student Loan Pay Back Programs
Category: student loans
WANNA LOWER YOUR MONTHLY?
When it's time to pay back student loans, you'll likely get a call from a lender asking if you'd like to lower your monthly payments. So let's say you have a monthly of $700.00, you might be able to drop this down to something like $403 instead. Sounds like a great deal? The extra $300 can save you from stress each month and even give you spending money to buy things that you didn't have while in college. A savings $300! That's an iPod.
WHAT'S THE CATCH?
The answer depends on how well you're informed in math. First, let's establish some groundworks. The monthly of $700 is based on the following typical assumptions: $60,000 loan at a fixed 7.1%, payable over 10 years. In order to drop the monthly to $403.00, lenders will have to change one of those numbers to something favorable to them and attractive to you. The most common way to do this is extending the payable years. Specifically, by extending the payment from 10 years to 30 years and keeping the other terms the same, your monthly will go down to $403.
That's good for you, what's in it for them? The answer is a lot more money. In your original loan, the total student loan pay back over 10 years is in the neighborhood of $84,000. That's $24,000 of interests over the amount you've borrowed. By extending to 30 years, the total payment goes up to $145,000. The total interest you're paying goes up to $85,000. So with a 30 year extension, you should be aware that you could be paying over twice the amount that you've borrowed.
SO HOW LONG DOES IT TAKE TO PAY BACK STUDENT LOANS?
Well, you gotta consider your situation as a new grad and begin taking responsibilities as an adult. Since each situation is different from the next, you have to learn balancing all the responsibilities, including financials, to make things work. For example, as a new grad, chances are you're among the many who are not getting a high paying job. So at first, money is gonna be tight. The drop in monthly payment can be a great help in paying back student loans. A refinance to 30 years makes sense. In the meantime, find a way to move up in your career so that you can earn more. When the time comes, consider accelerating the loan payment and refinance later to get out of the 30-year term.
But, if you're a new grad and somehow able to make the higher payments, either through a secured job, parental help, or both, then paying back the student loan as soon as possible is a better option. Paying off the loan earlier gives you a higher credit score and less headaches at an age when you begin thinking about family, houses, etc.
When it comes to sales pitches on loans, it's good to know how the numbers work. If something goes down (eg. monthly payment), something WILL go up (eg. total payments). When it comes to the best way to pay back student loans, the decision is always yours, but you're always better off not getting caught off guard.
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