And it would be trivial to solve that specific problem, which would simply require passing a law that says that the interest on student loans cannot, itself, accumulate interest. It becomes simple interest.
If you owe 5% on a $10,000 student loan, and the first year you pay nothing, you owe $10,500.
The second year you pay nothing, you owe $11,000 because you’re only paying 5% on the initial $10,000.
You are still paying interest, but you are not paying interest on the interest. So if something crazy happens and your loans are in forbearance for a year because you’re homeless or something, the only thing that happens is the interest builds up.
The way it’s currently set up in that same scenario, the first year, at the end of the first year of paying nothing, you would owe $10,500. At the end of the second year of paying nothing, you would owe $11,025.
“Doesn’t sound like that much, easy to overlook, let people deal with their own financial problems”, says the heartless person.
But the thing about compound interest is, as Einstein said, it is the most powerful force in the universe.
After years of only paying minimums (which are often set by the loan handlers to be less than the amount of interest that accrues each month, because our loan handlers are scum) and allowing the interest to compound on the interest, that 5% interest can end up being an additional $10,000 or $15,000 that you have to pay off on top of the $10,000 you initially borrowed.
And it would be trivial to solve that specific problem, which would simply require passing a law that says that the interest on student loans cannot, itself, accumulate interest. It becomes simple interest.
If you owe 5% on a $10,000 student loan, and the first year you pay nothing, you owe $10,500.
The second year you pay nothing, you owe $11,000 because you’re only paying 5% on the initial $10,000.
You are still paying interest, but you are not paying interest on the interest. So if something crazy happens and your loans are in forbearance for a year because you’re homeless or something, the only thing that happens is the interest builds up.
The way it’s currently set up in that same scenario, the first year, at the end of the first year of paying nothing, you would owe $10,500. At the end of the second year of paying nothing, you would owe $11,025.
“Doesn’t sound like that much, easy to overlook, let people deal with their own financial problems”, says the heartless person.
But the thing about compound interest is, as Einstein said, it is the most powerful force in the universe.
After years of only paying minimums (which are often set by the loan handlers to be less than the amount of interest that accrues each month, because our loan handlers are scum) and allowing the interest to compound on the interest, that 5% interest can end up being an additional $10,000 or $15,000 that you have to pay off on top of the $10,000 you initially borrowed.