Submitted by Aeronet on July 13, 2007
It is easy for consumers to forget just how expensive a few percentage points of interest really is. I made this point on Tuesday in my presentation at the annual conference of the National Association of Student Financial Aid Administrators. Assume you have $10,000 in loans and the interest is deferred for four years of study, and then the loan is paid in equal installments over ten years:
- For a subsidized Stafford loan (on which the government covers interest during deferment), the total interest you would pay during that 14-year period would be $3,810.
- For an "unsubsidized" Stafford loan, the 6.8% interest yields total interest payments of $7,967.
- If you have a private loan with an interest rate of 10%, you would pay $13,085 in interest on top of that $10,000 borrowed.
- At 12%, the cost increases by more than $4,000, to $17,091 of interest.
- At 14%, add another $4,000, to $21,469 of interest.
- At 18%, you pay a whopping $31,921 of interest on top of the initial $10,000 borrowed, more than four times the interest on an "unsubsidized" Stafford loan.
- Federal loans carry automatic full insurance in cases of death or disability. It's not something parents like to think about, but it happens.
- Home equity loans (which may carry an interest rate that rivals the federal rate) put your home at risk.
- Federal loans have unemployment and economic hardship deferments, as well as up to 60 months of forbearance.
- No prepayment penalties on federal loans, and some ability to extend repayment without a change in the interest rate.
- The interest rate on federal loans doesn't go up when rates in the economy increase. (Though it also doesn't go down if rates were to drop).