Explanation of student loan amortization: how to pay off your debt faster
Student loans can be intimidating.
There are so many technical terms you need to learn in order to maximize your redemption strategy. Terms such as IBR, REPAYE, excess deductions and depreciation.
Let’s do this last, shall we? What is student loan depreciation and how does it affect your monthly payments?
What is depreciation?
To understand depreciation, let’s begin with a brief overview of loans.
There are two types: the first is a revolving credit, like a credit card. With a revolving loan, you have a credit line of a certain amount (say, $ 1,000) that you can borrow over and over. Your monthly payment depends on how much of this amount you borrowed at present. As long as you do not exceed the limit and make at least a monthly payment, you can borrow the same money many times.
The second type of loan is an installment loan that includes mortgage loans, car loans, and student loans. This is a loan that you lend once, and then gradually return. As a rule, these loans have a fixed monthly payment — part of this payment goes to the principal amount, and a certain amount to the interest.
Depreciation refers to the process of repaying a loan in installments on a fixed payment schedule. Unlike a revolving loan, you cannot “borrow” the money that you returned, but the amount of the monthly payment on a loan in installments will also not fluctuate in the same way as with a revolving loan.
How depreciation affects the monthly student loan payment
It may be illogical, although your payment on a regular loan in installments is the same every month, the amount of your monthly payment, distributed to the principal amount and the percentage change over the life of the loan.
Almost always, most of your monthly payment goes on interest in the early years of repayment. Below is a table of my student loan payments for 2013.
You can see that, despite the fact that I paid over $ 3,300 for this loan over the course of a year, I reduced my balance by about $ 700 – and this is only because I started making additional payments.
Since the balance of this loan was more than $ 55,000, it was quite difficult to swallow. So, if you only started paying student loans, you could pay hundreds of dollars a month just to see how your balance decreases by a fraction of that amount. Breakdown! #AmortizationInAction
Depreciation and return on income
In accordance with some redemption plans, especially income-based plans, such as IBR, PAYE and REPAYE, your monthly payment is not fixed – it depends on your income.
However, the amount of interest you earn does not change. This can lead to a situation where your monthly payment not only fails to pay the principal amount, it does not even cover the interest due! This is called negative depreciation.
Observing the growth in balance due to negative depreciation can lead to frustration, but it is worth it in the long run if you are waiting for forgiveness of loans. Just remember that if you leave the income-oriented plan, your interest may be capitalized (added to the main balance sheet). When this happens, you pay interest on your interest. Not good.
Fortunately, you can make additional payments, even if you have an income-based plan, which helps avoid negative depreciation.
In addition, if you use an income-based repayment plan, the government will pay the remaining unpaid accrued interest on your subsidized loans, including the subsidized portion of the consolidated loan, for up to three consecutive years after you start paying off the MDBs or paying the salary The new REPAYE plan will also have similar benefits.
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