Tuesday, May 10, 2011

The long and short term costs of loans

Let's say that I take some amount of loans out for just my second year of the MBA program.  The loans have only one year to accrue interest in school and I can take out a max of $8,500 in subsidized and $12,000 in unsubsidized Stafford loans and the rest can only be PLUS loans.  This isn't entirely accurate as it ignores the private student loan market, but let's accept it as a simplified worst-case scenario.


Loan Amount Loan type & rate Interest per year Fees At graduation Payment Total paid
$8,500 Sub. Stafford 6.8% $0 1% $8,585 $99 $11,856
$29,000 above + Unsub Stafford 6.8% $816 1% $30,106 $346 $41,575
$50,000 above + PLUS 7.9% $2,475 4% $53,605 $630 $75,617
$65,000 above + PLUS 7.9% $3,660 4% $70,390 $833 $99,971
$82,349 above + PLUS 7.9% $5,031 4% $89,803.53 $1,068 $128,113

That ends up being pretty expensive over time!  Even with no interest during school and a 1% loan fee I'd pay 39% more by financing the $8,500 instead of finding another way to pay for it.  At the high end, you more than 55% more by financing the entire student budget.  Of course sometimes you don't have the cash to pay, but over $20,000 of the student budget is living expenses.  This makes a really good case for living cheaply.  Going out for drinks is no longer a good deal if your $20 bar tab becomes $30.  Similarly, while I might pay $30 for a dinner out somehow $40 doesn't seem as reasonable.  With that math I'm not sure how anyone can justify financing living expenses.  Just another reason for me to stick to my guns and take on as little debt as possible.

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4 comments:

  1. Loans can either be a cash advance loan, car loan or housing loan that every qualified individual can apply. An individual who applies for this one and gets approved must learn how to organize and pay his debts. It is his responsibility to pay the amount on time to prevent skyrocketing of interests. This is also a characteristic of a responsible lender.

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  2. This is very simple. The bigger you borrow, the higher the interest rates as well. If there's no need to borrow big amount of money, then go with lending the smaller amount. Remember, the smaller amount you borrow, the smaller the interest rates it will incur.

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  3. I agree with the previous comments. If you need to borrow money for emergency purposes only, then try to lend a smaller amount. Don't be tempted to borrow bigger for you will also be tempted to spend it on non-related things.

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  4. This loans information is really beneficial for me. I personally thank for sharing it with people. Nice work

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