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What is the average monthly cost of student loans?

How much will $1 in student loans cost me in 15 years?

  • I'm trying to figure out the cost of spending my student loan money by estimating how much $1 spent right now will have cost me to repay by the end of 15 years of loan repayment. I will have an estimated $28000 in student loan debt by the time I graduate, in the form of Stafford and Perkins loans. (Note: I'm currently ignoring the interest rate hikes effective as of July 1st, 2013 that will cause Federal Subsidized Stafford Loan interest rates to double from 3.4% to 6.8%). I'm using a formula found on Wikipedia's article on http://en.wikipedia.org/wiki/Compound_interest to compute my necessary monthly payments with interest compounded monthly. I found my monthly interest very roughly by dividing the annual interest rate for each loan type by 12. These are rough approximations, and part of my question is whether these assumptions are close enough to reality to be useful, or if I should use a more accurate measure of student loan interest, which is actually compounded daily apparently. My main question is basically this: how should I account for inflation and the falling value of the dollar in my student loan calculations? I found that a $1 spent from my student loans now will cost me ultimately $1.68 to pay off. But over the period that I will be repaying my loans, the dollar will have depreciated such that $1 saved now will only be worth $0.64 after 15 years (with an assumed constant inflation rate of 3%). Does this mean that  the cost of $1 in student loans now after 15 years of repayment is actually $1.68 * .64 = $1.08 in 2013 dollars? TLDR: How do I account for inflation in estimating my student loan costs?

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JW Warr at Quora Visit the source

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You account for inflation by subtracting it from the interest rate.  Wages generally rise with inflation, but the interest rate won't.  So if the nominal interest rate on your student loans is 3.4 percent, and you expect inflation to be 3 percent (historically it's been 3 to 4 percent over the long term; recently it's been more like 2 to 3); use a real interest rate of 0.4 percent.  Or you can use the Fisher Equation, which is slightly more precise.  http://en.wikipedia.org/wiki/Real_interest_rate#Fisher_equation That will tell you how much you'll pay in the future in today's dollars.  As far as calculating monthly interest payments, use excel functions PMT, PPMT, and IPMT.  You can make the compounding period whatever you want--just be sure to adjust the interest rate accordingly and have a column showing the principal dropping as you repay it every month. Of course, you might end up earning enough money that you can repay your loan ahead of schedule.  Depending on what else you could be doing with the money (i.e., tax advantaged retirement savings, paying down higher interest debt), prepayment may or may not be advisable. To calculate payments if you prepay, just shorten the number of periods in the PMT functions.

Mike Simkovic

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