Interest only on Student Loans

[AshleyJordan]

Anyone else only paying the interest on their loans? It's a little depressing that, in my first few months of paying my student loans back, I've barely touched the principle-- I just keep paying more and more interest!!!!

[WorkInProgress]

Anyone else only paying the interest on their loans? It's a little depressing that, in my first few months of paying my student loans back, I've barely touched the principle-- I just keep paying more and more interest!!!!

It was like that for me when I first started paying them back. (And actually, for the first couple months, the amount I owed overall increased, despite my payments. I was waaaaaay depressed over that at the time.) Now I'm working on the principal.

[AshleyJordan]

Eh. At least I get the tax break.

[Kitty]

I only paid interest for about 6 months. I'm on to principle now. But yeah, it was depressing.

[redav]

I only paid interest for about 6 months. I'm on to principle now. But yeah, it was depressing.

Oops! I can't read. Sorry. I understand now.
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If a loan is set up with fixed payments for a fixed number of payments (like a car loan or mortgage), the first payments will have a lot of interest built-in, because that's when the balance is the highest. Toward the end, there will be very little interest in each payment. For example: for a 30-yr loan at 10%, the first payment will be 95% interest and 5% principle.

An interesting fact: For an installment loan, if you double the principle in each payment, the loan will be paid off in half the time.

[AshleyJordan]

But interest compounds.

[WorkInProgress]

I'm missing something here. Typically loans work by adding the interest earned and subtracting your payment, yielding your new balance. That means every payment pays interest, and unless it is an interest-only or sub-interest-only payment schedule, includes some principle, too.

If a loan is set up with fixed payments for a fixed number of payments (like a car loan or mortgage), the first payments will have a lot of interest built-in, because that's when the balance is the highest. Toward the end, there will be very little interest in each payment. For example: for a 30-yr loan at 10%, the first payment will be 95% interest and 5% principle.

An interesting fact: For an installment loan, if you double the principle in each payment, the loan will be paid off in half the time.

The payment only covered some of the interest. (Like, say, principal is 15k, and there's 2k of interest built up, so the first several payments, will pay down only interest and not principal.) My student loan account online had it broken down this way, so when I'd see me payment deducted from the loan, I'd see that it only paid down the interest.

(Sidenote: is it principal or principle? -al makes me sense to me, but I never studied this stuff in school to know.)

[AshleyJordan]

My payments are currently split (which is to say that every month the interest accrued is less than the monthly minimum payment,) but I still have barely touched the principle at all.

[wordsmith]

I paid on just the interest for YEARS...it's only recently that I started to otherwise make a dent.

[Chameleon]

An interesting fact: For an installment loan, if you double the principle in each payment, the loan will be paid off in half the time.
Don't know how you'd prove that since the amount of principal you are paying varies and as you noted, you are only paying a really small percent on principal at the start. Did you mean if you doubled your monthly payments? On a long term loan like a 30 year mortgage, you only (ha, only) had to pay about 30% more of your monthly payment to cut the time in half.

Bloomberg has a mortgage calculator (http://www.bloomberg.com/invest//calculators/mortgage.html) which I'm sure can be used in figuring out how much interest you are paying on the student loans and how paying ahead affects your pay schedule (this is, of course, assuming you could comfortably pay more than the required amount).

[redav]

Don't know how you'd prove that since the amount of principal you are paying varies and as you noted, you are only paying a really small percent on principal at the start. Did you mean if you doubled your monthly payments? On a long term loan like a 30 year mortgage, you only (ha, only) had to pay about 30% more of your monthly payment to cut the time in half.

Bloomberg has a mortgage calculator (http://www.bloomberg.com/invest//calculators/mortgage.html) which I'm sure can be used in figuring out how much interest you are paying on the student loans and how paying ahead affects your pay schedule (this is, of course, assuming you could comfortably pay more than the required amount).

It means that you double the amount that goes toward principle in each payment. For the example given, the first payment would be 5% more than the standard payment. You are correct that the amount paid each month would increase.

Here's one way to think of the proof: In each payment, the portion that is for principle is the entire "actual" payment. The interest is just cost; we will ignore it since it does not reduce the principle. Every "actual" payment has the same value when adjusted for time. (Yes, I should prove this statement, but you can check it by looking at an amortization schedule and calculated the value of each principle payment at a given point in time.) The result of this fact is that each "actual" payment reduces the final value of the debt by the same amount. The first payments are less because due to the effect of time--effectively their effect has time to grow, while the last payments don't. Since their effect is the same, it doesn't matter when you make the payment. If I pay twice the principle in the any month, I deleted another month's payment. Thus, doubling the "actual" payment for half the term eliminates the entire debt.

However, the method is not perfectly exact mathematically. After all, we're not dealing smooth, well-behaved functions. You will get stuck with some small, trash values at the end, but it's close enough to treat as a solid rule. Since it's unlikely that you could pay a constant amount each month to cut the term in half (e.g. for 30 yr mort at 6% = 41% higher payments, for 5 yr car loan at 8% = 82% higher payments), it's more likely you'd be able to pay a little extra at the beginning and ramp it up with each progressive year.

[redav]

sorry, double post.

[beeblebrox]

I paid my interest alot at the beginning. In two years of paying, I've increased the amount I pay monthly. On my student loan, you can pay more and make sure that it doesn't advance the due date and the extra goes to the prinicpal. My minium is $165 about $40 of it is interest. Since I started paying extra ($200), my principal paid is $165 and about another $40 for interest.