When I was in college, my student loans were a complete mystery to me. I was completely clueless about how much I had borrowed in loans, how to view the status of my loans, what my interest rates were, when interest would begin to accrue, when I was supposed to start paying them, etc. What I soon found was that it was not just me who didn’t know the answers to these questions. Questions on loans began circling my senior class weeks before our graduation day, yet no one seemed to have any answers.
I find it crazy that I went through my entire four years of college and not once investigated the details of my student loans. Clearly my mindset was not focused on the thousands of dollars I would eventually have to pay off. My college self felt more comfortable pretending that the loans did not even exist. (Horrible decision!!!) I don’t understand why it is not mandatory for colleges to sit you down and explain exactly what to expect in regards to understanding and paying off student loans. Even if they had snuck in a one hour class on student loans during freshman orientation, something, anything, would have been immensely helpful. If you find yourself in a state of confusion when it comes to your student loans, continue reading this post. I have learned quite a bit about loans (from my own personal experience) and would like to share with you some of the most basic concepts of loans, using my own loans as a primary example.
I have 9 total loans that I need to pay off. I did not know this exact number until a few months after graduation, and I received a letter from MyFedLoans reviewing 8 of my loans, and MyCampusLoan which reviewed my 8th loan. In total, I started out with about 33k in loans.
This is about the time when I learned a little more about interest. My unsubsidized loans have been accruing interest from the day the loans were taken out in my name. This means that my one unsubsidized loan from freshman year has been accruing interest steadily for 4.5 years, my one unsubsidized loan from sophomore year has been accruing interest for 3.5 years, and so on.
My subsidized loans, thankfully, did not accrue interest while I was still in college. Now, I was under the impression and led to believe that interest on these loans would not start to accrue until I had to begin paying them off. Unfortunately this information is false. During the first three months after graduation while my loans were in their grace period, interest had begun accruing on these loans as well. This definitely would have been helpful to know sooner.
Another aspect of my loans that I did not learn until months after graduation is how exactly the interest accrues on them. For all of my loans, I have daily accruing interest. (Very common across most student loans) This means that every single day, I am being charged a portion of interest that is dependent on my current loan balance.
The number one reason why this information would have been extremely helpful for me to know at the onset of acquiring each loan is that I would have been able to manage my loans in a much more intelligent manner much sooner than I did. If I had known that I would actually be paying close to $6000 more than my initial principal loan balance at the onset of my repayment period, I would have begun making my student loan payments while I was still in college.
Now that I do have this information and have a much better understanding of how my loans work, I am able to act smarter in my repayment period. If I only make the minimum required payments each month, I will be paying exponentially more than if I choose to make payments each month as large as my income and budgeting will allow.
If I were to only make minimum payments from the very start, I would be done paying off my loans in 10 years. If I want to be a successful investor and manage my money in the best ways possible to retire early, this is definitely not going to cut it. Currently, I am able to double my student loan payments (I pay $680 each month in loans, instead of just paying my minimum requirement of $340 across all loans each month). Already, I have dropped my expected end date from 10 years to about 8.6 years. The beauty of doubling my payments is that this does not mean that I will be finished paying off my loans in half the time (5 years as opposed to 10 years). Instead, if I continue doubling my payments, I will actually finish paying off my loans much sooner than 5 years. This is due to the daily accruing interest. Since I am making larger payments each month, the amount of overall interest that I will be paying over the course of my loan repayment will decrease dramatically. I completed some calculations with my loan amounts and interest rates with the help of a loan payoff calculator and discovered that if I continue to double my student loan payments, I’ll be finished paying off my loans in about 3.8 years from now, as opposed to the dreaded 10 years. (Fantastic news for me!)
Again, it would have been extremely helpful to have known these little tidbits about loans while still in college. I would have started to pay off my loans even sooner, which would have decreased the amount of interest I now have to pay off. Sadly, it seems more often than not that most college grads never take the time to learn these details. They stick to their minimum payments (or worse—look into deferring their loans longer or reducing their minimum payments), and end up spending years and years paying off their loans (and end up paying much more in interest during this time).
In order to achieve my goal of early retirement and financial independence at a young age, I know that I need to pay off my loans as aggressively as possible. Next, my #1 financial goal will be to diligently save, and then to transfer most of my savings into investments. And this is when the real progress toward financial independence will begin for me!
If you have anything at all to add about student loans that you think would be helpful for others to know, or if you would like to share your own experiences with student loans, please comment below. Thank you!