Interest rates on student loans mean borrowers end up owing thousands more

Matt Gonzales, who works in education in New York, says teen vogue that he has made regular payments on his approximately $104,000 in federal student loans over the past six years, payments totaling $10,710. But according to his loan account, only 4% of his total payments — $462.13, to be exact — went towards his main balance. The remaining 96% of those thousands of dollars in payments went to interest.

“Literally, until the government puts a pause on [making payments], it was stressing me out,” says Gonzales, 37, adding that his loan repayments were $500 a month before the moratorium began. “The fact that I didn’t pay for this during the pandemic was a huge relief. It has always been a burden; it’s always going to be a burden. You’re in a sinking boat and you try to use a bucket to empty the boat, but there’s a hole in your bucket, so you don’t do anything to prevent it from sinking.

People often don’t realize that the interest rate on student loans means people are paying very different amounts for the same degree, Shermer says. Wealthy families who can afford the cost out of pocket end up paying much less because they avoid the extra interest and possible fees and penalties that come with extended repayment. For people who need loans to cover their tuition, that same degree could cost thousands or even tens of thousands of dollars more.

Nashville-based community activist and labor organizer Brenda Waybrant said she took out about $43,000 in student loans and graduated in 2008. She consolidated her loans through FedLoan in 2013, followed a repayment plan based on income and has made regular monthly payments of around $360 since. The amount fluctuated, Waybrant says, but about eight years and about $33,000 to $35,000 in payments later, he still has $40,000 left in his balance.

Adjusted repayment plans are usually communicated to the public as a form of economic relief or compromise for troubled debtors, but Shermer says they can do more harm than good. Low-income borrowers can get a repayment plan that doesn’t require them to make monthly payments on their federal student loans — hence the temporary relief — but interest still accrues. This unpaid interest can then be capitalized, which means that the total interest is added to the principal balance as a new total. In effect, borrowers end up paying interest on their own interest.

By the time people are financially stable enough to make regular payments, they have accrued so much interest that it takes years to dent their capital. It took Shermer herself just under 10 years of regular payments cutting interest to reach her own capital.

“A lot of this interest rate stuff is actually being debated in Congress. Everyone expected a book about big bad bankers, but it’s really about politicians doing the wrong thing. not do,” says Shermer, referring to his book, Students under contract. “Instead of actually investing in the public infrastructure that we need – our colleges and universities – what they’ve done is give people a very complicated loan program.”

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