Why Making Minimum Payments on Student Loans Will Come Back to Bite You
If you’re a millennial, chances are can relate to this scenario:
You graduated college with around $36,000 in student loan debt, and you entered the workforce with every intention of paying it off… only to find that after all the bills are paid, your leftover earnings aren’t exactly what you imagined after finishing that higher degree.
Rising food, housing, health care, and education costs have left your generation worse off financially than your parents’; believe it or not, the net worth of Americans ages 18-35 has dropped a staggering 34 percent over the past 12 years!
When you’re in this situation, it’s both tempting and common to get in the habit of paying minimum monthly payments on your student loans - whether that be on an income-based or standard repayment plan.
In fact, it’s likely that your student loan provider will present these plans as your best and most affordable option. After all, making minimum payments will leave you more money in your bank account to spend as you please - right?
When a loan provider offers you a tempting minimum payment on a standard or income-based plan, it’s important to evaluate what this actually means for you.
Imagine you have $36,000 in loans, with a 5% interest rate. It’s likely that your minimum payment will be around $200. While this seems affordable, it’s crucial to remember that interest is accruing daily and your loan provider is profiting off your debt with each day that passes - By the time you’ve paid off your loan, not only will it take 27 years, but you’ll have paid an additional $30,680 in interest!
If you were to pay an additional $300/mo on that same loan, you would pay only $6,890 in interest and be debt free in 7 YEARS!
The reality is that making minimum payments will cost you thousands of dollars in interest, and could increase your payoff time by a decade or more!
Imagine how much wealth you could build if you paid off your loans 10 years early - instead of 10 years of interest working against you, you could put that monthly payment towards retirement accounts, making interest work FOR you and earning the money you would otherwise be paying.
Everyone’s financial situation is different, and for some people making minimum payments is the only viable option. However, it is our goal to make sure every graduate has the ability to make educated decisions surrounding their debt repayment plan.
If you’re interested in paying off your student loans aggressively, the Destiny Debt App (Download on iOS or Android today) has a fantastic mobile platform that helps you pay off your student loan debt faster. Using their unique algorithms, the Destiny app creates a customized debt repayment plan, saving users over $3,000 on average in the first year!
Securely link your debt accounts, fill out some information, and Destiny will provide you will the plan that saves you the most money based on your current lifestyle.