In my opinion, the banks, your school, the government all legally lie to you about the interest rate you pay on your student loans. This is based on observation and experience that I share further on in this post if you care to learn.
My son took out two student loans to help pay for college. No one forced him to take out the loans and this is not a post looking for loan forgiveness. This post is to educate anyone willing to listen, review the facts, and check out their own loans (or those of their children).
If math is not your strong suit, either in ability or personal interest, you may want to skip to the end. The original loan balance: $17,944.00; the current balance when creating this post was: $13, 442.99. The note said 4.35% interest. Hogwash!
Let’s look at some inconvenient facts. Very inconvenient for my son or anyone else paying back just following the payment book. To date, the total principal paid: $8520.81; the total interest paid: $4137.61 (48.55%). He did have a couple deferrments in there, but should not be enough to equal almost 50% interest.
I put the numbers in the narrative paragraph above into a table below, rounding everything to the nearest dollar and the nearest tenth of a percent. So, there will be some rounding errors in the table, but the errors are insignifcant and the table is easier to follow.
| Description | Principal | Interest | Interest as percent of principal |
| Totals | $8,521 | $4,138 | 48.6% |
| Monthly Payment | $192 | $49 | 20.2% |
You don’t believe me, you say. He must have had more deferments than you remember or are willing to admit. Let’s look at the payments and see the story they tell. His minimum payment is $241.14. When he makes that payment, the interest amount is $48.75, leaving $192.39 for principal. If you take $48.75/$241.14 you get 20.2%. Read that over again and really let it sink in. His other loan was even worse at about 25%.
How can this be legal you ask? Simple, the 4.35% interest advertised and promoted to borrowers and co-signers is interest calculated, and compounded, each month based on the total balance.
From the banks point of view, the interest rate is 4.35%. Take $13,443 (current balance) *(.0435 (annual rate) /12 (one month)) = $48.75.
From a practical standpoint, 48.75/241.14 translates to 20.2%. This will be your actual interest rate if you don’t pay extra. If you or someone you support financially or love has a student loan I implore to look at the statement and calculate it for yourself. If you don’t feel financially accosted I cannot relate to you.
Erik Brown 