Normally, I’m all for compound interest (when the interest you earn is added back onto the original amount, so then your interest ends up earning interest) when it comes to my savings or investments.
Not so much when it’s being used on my debt! To finance my fancy book learnin’, I’ve taken out student loans. One is a nice Stafford loan, with interest paid for by Uncle Sam. Thanks! Another is a Stafford loan and its interest is not being paid by the fed. Finally, I (well technically my father) took out a Parent PLUS loan to pay for the remainder of tuition/other educational expenses.
So far, I’ve accumulated $59 in interest charges on just the PLUS loan. That amount will come close to doubling by the end of the 2010. Then the real fun starts. Another $4000 will be released to my school to pay for winter quarter. Interest will now be charged on $8000 and the interest from 2010 will be tacked on to the original amount, I think. I’m not sure about the exact timing, but I do know that the interest will be compounded at some point.
You can find out how much you’re paying everyday on a Parent PLUS by using the following calculation:
Interest rate X current principal balance / number of days in the year = daily interest
So everyday, I’m paying 86.6 cents just in interest. Over the next few years, the amount will continue to grow. The point of this is simple: be aware of what you’re borrowing and how much it’s costing you. It’s easy to take out loans and then forget what they’re costing you. If you knew you were being charged 86 cents or 2 dollars or 10 dollars everyday, would that change the way you view your debt?
