WHAT A DIFFERENCE $50 CAN MAKE

Many borrowers ask, “How can I cut down on the overall cost of my loans?” The following examples are designed to illustrate the money you can save by making extra payments or by choosing a shorter repayment schedule. Each example is based on a $150,000 consolidated loan (including principal and interest) at an 8% fixed interest rate, with the borrower entering repayment.

Choose a 10-year repayment term instead of a 20-year term.
Pay $50 extra each month against the principal balance.
Make an extra $600 lump-sum payment each year against the principal balance.

Illustration #1: Paying the loan in 10 years vs. 20 years saves you about $.55 per $1 borrowed ($1.46 vs. $2.01) – save $82,728!

$150,000 at 8%	10 Years	20 Years
Monthly Payment Amount	$1,820	$1,255
Total Finance Charge	$68,390	$151,118
Total Amount Repaid	$218,400	$301,200

Illustration #2: Paying $50 extra each month can decrease the cost of the loan and shorten the time it will take you to complete repayment. In this example, save $3,031 and repay the loan four months early (last payment = $319).

$150,000 at 8%	Regular Payment	Extra $50
Monthly Payment Amount	$1,820	$1,870
Length of Term	120 months	116 months
Total Finance Charge	$68,390	$65,359
Total Amount Repaid	$218,400	$215,369

Illustration #3: While it can be time consuming to verify every month that an extra payment is credited to the principal balance properly by your lender, similar savings may be realized by making an extra payment once a year (in this example, $600 every June). Save $2,721 and repay the loan four months early (last payment = $979).

$150,000 at 8%	Regular Payment	Extra $600
Monthly Payment Amount	$1,820	$1,820 $2,420 every June
Length of Term	120 months	116 months
Total Finance Charge	$68,390	$65,669
Total Amount Repaid	$218,400	$215,679

It is important to note that if you do not specify how you want extra payments credited lenders may apply your extra payment to future regular installments. (In essence, you would be paying interest before it has been assessed.) To avoid this, include a prepayment letter with your payment and request a receipt showing the new principal balance.

You may also make extra payments during deferment periods without any penalty. In fact, it is generally to your advantage to take all deferments you are eligible for even if you can afford to make substantial payments. This way, you may direct the entire amount to the principal balance. Some lenders will allow you to direct extra payments made during deferment to the principal balance even though you have an unpaid interest balance that accrued while you were in school. However, the Federal Direct Loan and Federal Direct Consolidation Loan are exceptions. With these programs, you must pay all outstanding interest before making any extra payment to principal. As a rule, you should make extra payments to the principal balance of the most expensive loan you have.

ESTIMATING MONTHLY PAYMENTS

For a quick estimate on the monthly payment required to repay a loan at an 8% interest rate over 10 years, divide the amount borrowed by $10,000 and multiply the result by 125. Listed below are some websites (in alphabetical order) that contain loan payment calculators.

Direct Loan Program
SallieMae
Business Times
nelnet
FinAid
NellieMae

If you know of other websites that contain helpful information, please let us know. We will be glad to consider your information for our website.

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