How to Determine the New Student Loan Payment and Cost After Forgiveness

  • The Biden administration has announced that it will cancel at least $10,000 in federal student loans for many borrowers.
  • If that doesn’t clear it completely, the student loan forgiveness policy will reduce your balance.
  • Your total savings will depend on how much you still owe on student loans, the repayment term, and the interest rate.

The Biden administration’s decision to forgive tens of thousands of dollars in federal student loans will relieve many borrowers of all of their student debt. For those with balances remaining after the discount, the total savings will add up even more.

Under the forgiveness plan, the government forgives $10,000 of student loan debt for borrowers earning less than $125,000 a year and up to $20,000 for Pell Grant recipients. All types of federal loans will be eligible for forgiveness, but private student loans will not be affected. Married couples or heads of households earning less than $250,000 will also be eligible for assistance.

The move completely wipes out total student loan debt for at least a third of borrowers. However, those with larger balances will eventually get even more relief.

Student loans get more expensive over time

Remember that the total cost of your loan is not just the amount you borrow to pay for your education. You will also have to pay interest, which increases the cost of your studies over time.

The $10,000 the government forgives most borrowers will reduce their loan balances, reducing the overall amount they have to pay in interest. The amount saved depends on the balance and the interest rate, as well as the repayment term.

The real savings for the average borrower

Average debt per borrower for the 2019-20 school year, the most recent data available, was $28,400, according to the College Board. Based on this, a loan term of 10 years with a fixed interest rate of 4%, your total lifetime student loan costs would be $34,504 paid over 10 years, and you would pay $288 per month.

However, after accounting for $10,000 in loan forgiveness, your balance will be $18,400. On a loan term of 10 years with a fixed interest rate of 4%, the total lifetime costs of your student loans would be $22,355 paid over 10 years, and you would pay $186 per month. That’s $102 less per month and $12,149 less over the life of the loan.

For the table below, assume a 10-year loan with a fixed interest rate of 4%.

To calculate your total savings, calculate the total cost of the loan under your old balance, subtract the total cost of the loan with the new balance, then subtract $10,000 from this result. Use a student loan calculator to find out the total cost of your loan. Your average monthly payment will be about $100 less than before.

The amount of savings you receive will depend on the interest rate on your loans. The higher the interest rate, the more you will save once the balance is reduced.

How does student loan interest work?

Simply put, student loan interest is a percentage of your total loan balance, which is the fee you pay to use the lender’s money. The interest rate you pay will vary depending on the type of loan and your lender. The federal government offers three separate flat rates for undergraduate students, graduate and professional students, and parents of undergraduate students. Interest rates vary considerably from one private lender to another.

Although the percentage you pay in interest may seem small at first glance, it can really add up over time.

“What a lot of people are going through is that they could pay off their loans for a few years and never reduce the principal,” says Stacey MacPhetres, senior director of education finance at education program provider the EdAssist Solutions workforce. “Usually the reason is that you pay your interest first.”

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