- About 27% of millennials didn't understand the terms and policies when signing up for their student loans, according to a Business Insider Intelligence survey.
- The power of compound interest often comes as a surprise: Some borrowers don't realize they'll end up owing much more than the initial loan amount they borrowed.
- The average student-loan borrower owes $33,654 but will end up paying $41,913 between interest and principal payments over 10 years, based on federal loan interest rates.
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Signing up for a student loan is easy — knowing what you're signing up for isn't.
Just ask the quarter of student-loan-indebted millennials who said in a recent Business Insider Intelligence survey that they didn't understand the terms and policies of their student loan when they first took it out. The online survey polled 2,007 American millennials born between 1982 and 2000, fielded to a third-party sample between November 22 and November 27, 2019.
Of this group, 11% said they didn't understand the terms and policies of their loans at all well, while about 18% said they didn't understand them so well. An additional 26% said they understood the terms somewhat well, and the remaining 46% said they understood them very or extremely well. (These percentages don't add up to 100% because of rounding.)
It can be difficult to envision what repayment will look like when it seems so far away, especially if you're self-taught when it comes to personal finance — the case for 37% of millennials in the survey.
That lack of clarity on terms and policies leaves some students feeling blindsided come graduation time. Daniela Capparelli, age 35, previously told Business Insider that as a first-generation student, she didn't have any guidance on her loans. She graduated from a private college with $150,000 in debt and will have paid $309,000, including interest, over the loans' life.
"If I knew I would pay back more than double, I may have chosen a different school," she said. "The compound-interest factor and the actual payback was a huge surprise."
How student-loan interest works
There's no denying the power interest rates have on overall repayment. Interest rates are the amount you pay to take out the loan, according to Student Loan Hero.
The way interest adds up depends on the type of loan you take out. Unsubsidized loans start accruing interest the day the loan is dispersed to your bank account. Meanwhile, you don't have to pay interest on subsidized direct loans until you graduate — the interest still accrues while you're in school, but the government pays for it.
Once you start making payments, your money will be put towards the interest first and towards the principal amount (the balance due without the interest) second. As the interest paid declines during the loan's life, you'll start to pay off the principal faster.
To see interest in action, consider the average student-loan borrower. They owe $33,654, according to loan-comparison site Credible, citing the US Department of Education data from December 2018.
Current federal interest rates for students taking out loans through June 2020 are 4.53%. That means the average student-loan borrower will end up paying $41,913 in principal loan payments and interest over a 120-month, or 10-year, repayment period. That breaks down to monthly payments of $349.
But you can save money on interest by increasing your monthly payment. Following the scenario above, if you pay an extra $100 every month, that will bring your total payment down by $2,282 to $39,631.
If you have multiple student loans, you can also consider refinancing them, which combines them into one. But tackling student loans ultimately boils down to your personal situation. Always take a careful assessment of your current student-loan plan and overall budget before creating a pay-off strategy.
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