Each year, 20 million students attend college in the United States, and approximately sixty percent of those students borrow money to cover the expenses of tuition, textbooks and fees. With college being the first major financial decision many young adults make, you’d be surprised to find out how many are genuinely confused about the application process. Many do not consider that the amount borrowed and the interest rate of the loan could impact your finances for the rest of your adult life, long after college is over.
For those who are confused, the basics are this: the average student takes out nearly $30,000 in student loans over four years. With an interest rate of 9% annually, the student can expect to pay nearly $15,700 in interest over ten years, if it took them ten years to pay off the loan. That is a lot of money in interest, over half of the original amount borrowed. The monthly payment on this amount would be $380, which is a lot for someone right out of school and making entry-level salary.
With the basics covered, let’s discuss a few ways to save money on student loans.
Shop Interest Rates
Say that by shopping for private loans you got an interest rate from a lender of 7%, which is competitive given that the federal rate is 6.8% currently. The same borrower who took out $30,000 at 7% interest annually would pay $11,800 over ten years, with a monthly payment of $350. For those interested in a lower monthly payment, this is a monthly savings of $30, or $360 each year that could be used to fund a savings account or contribute to retirement.
The difference in interest rates in our examples shows total savings on the initial loan of almost $4,000.
Re-Invest the Savings
If a student were to take that extra $30 each month and apply it to their student loan balance, they’d be able to pay off the debt in 8.8 years (as opposed to 10) and save an additional $1,384 in interest.
Many students do not feel the need to shop for loans, but $4,000 for an afternoon’s worth of research is a lot. It may not seem like a large amount now, especially if you space it out over ten years, but as a working adult, $4,000 adds up quickly. It could add to the down payment on a house or serve as the total down payment for a car.
Get Creative When Shopping for Loans
Also, don’t forget to consider more creative options when it comes to shopping for education financing, such as using peer-to-peer lending sites. New technology, like Achieve Lending’s student loan search engine and comparison tool allows students to competitively shop interest rates between traditional private lenders along with these creative options with ease.
Borrowers are always encouraged to shop for interest rates and get the total picture before signing on a loan. As you can see, shopping for interest rates not only saves you money over the lifetime of the loan but if you use the extra cash wisely, interest rate shopping can help you pay off debt faster. When you’re ready, you can click here to begin shopping for loan interest rates.
What other ways do you think student loans can be made cheaper?