One of the biggest reasons I started paying extra on my student loans was because I realized how much money was going to interest.
When I started paying off my student loans, my minimum payment was $350. About half of those initial payments were going to interest. That means $175 a month – or 10% of my take-home pay at that time – was being flushed down the toilet.
Interest is the money you pay to the bank for letting them lend you money. Interest is how banks make money. The interest rate you have depends on the kind of loan you have, how trustworthy of a borrower you are and how well the economy is doing.
My interest rate was 6.8%, which is double the amount some people pay for their mortgages. Since my loan was unsubsidized, the interest capitalized while I was in school and not making payments.
Like I said, paying that much interest made me mad. Mad enough that I cut expenses and started putting any extra money toward my loans. $175 a month could pay for my utilities, internet and Netflix bills. With money left over.
Here’s a brief list of what $175 could pay for:
- Almost two week’s worth of groceries for my husband and myself
- Four vet appointments for my dog
- Two wedding dresses
- Car insurance for a month
Most of us only think about how much we borrowed when we think about the cost of our loans, but we should also include the interest. If you have information about your loan handy, use this calculator to figure out the total cost of your loan.
That’s the second number that will likely surprise you. I remember if I had paid my loans off in 10 years instead of three, I would have paid more than $10,000 total in interest. My loan would have cost me almost $40,000 instead of $28,000.
If you want to see what $10,000 could get you, here’s another list:
- A down payment for a house
- Five trips to Europe
- Rent for a year
- Three month’s worth of insurance premiums
- An emergency fund
Pretty scary, huh? It’s those numbers that scared me when I started paying off my student loans. I didn’t write this blog post to scare you, I wrote it so you can understand how much your student loan actually costs you. It’s easy to make the monthly payment and forget about it.
Once you understand how much interest you’re paying, you can’t go back. You’ll start to look at your money differently once you realize that making different choices can save you thousands in the long run.
That’s what happened to me. I spent money recklessly before I started paying off my student loans. But afterward, I saw the power that a dollar could have. You add up enough of them and they can make a big difference in your life.
Figure out how much you’re paying in interest and if you want, leave a note in the comments.
Grab TCM’s Guide for saving on a tight budget and put those savings towards your student loans!
Read the original article on Invibed. Copyright 2016. Invibed is an online community for successful millennials who are building wealth and creating their dream lives. Follow Invibed on Facebook, Twitter, and Instagram.
Zina Kumok is a freelance writer specializing in personal finance. She writes a blog, Debt Free After Three, about paying off her student loans in three years.