How would you feel if a well-dressed guy in a black suit came to your door every day and demanded you pay him $20. He shows up every day: holidays, weekends, your birthday. Hell, he even shows up on February 29th every leap year. He always comes knocking, you always have to answer and you always have to pay. Wouldn’t you despise that guy?
Every day, your student loans experience something called compound interest. Compound interest was best described by a man named Albert Einstein this way: “Compound interest is the eighth wonder of the world. He who understands it earns it. He who doesn’t… pays it.” He was a pretty smart dude so I’m going to take his word for it. This is best described in some short math, so let’s take a look.
Let’s say we owe $100,000 and our interest rate on those loans is 7%.
If we first take 7% (or 0.07 as a decimal, makes it easier on a calculator) divided by 365 days in a year, we will find our daily compound interest rate. It is a seemingly minuscule number.
If you multiply that number by your loan balance, $100,000 in this case, you get $19.18. That is how much the man in the black suit takes from you every day. Ouch.
To further understand this, you must realize that you probably are only making one monthly payment on your student loans. So on Day 1 of the month, the interest that gets added is $19.18. But every day that interest amount grows just a little bit. See, this loan interest is growing not only on the principal amount – the $100,000 – but also on the interest that is added to the total each day. That’s what makes student loan interest brutal.
This can be somewhat depressing to think about, but this concept is exactly what got me fired up about paying off debt in the first place. I was not going to continue to answer the door and hand this “guy” my money every day. I worked hard for it, and I want to keep it. If you have student loans, doesn’t it make you kind of mad knowing someone is taking your hard earned money? Don’t let them do it!
While paying off debt overnight is not reasonable or realistic, starting somewhere is so much better than never starting at all. Take a moment to think about one way that you could make a larger student loan payment this month. If your minimum payment is $300, try paying $320 or $350. Maybe it’s only $100. Try paying $150 or $200 instead. That extra money knocks down the principal amount farther, leaving less principal for the compound interest to feed on as it multiplies. Ew, that analogy kind of sounds like a science experiment, I digress.
Let me leave you with a message of hope. Back in late September of this year, I was growing restless as I felt like my debt payments were not making the progress I wanted. I decided to go find a second job. I deliver pizzas two nights a week, typically, after my regular job, from 5:30-11:30PM. It’s not always fun, and those can be long days. But just from October 1st until today I’ve made almost $3,000 just from that second job. I haven’t touched that income for anything other than student loan debt. I take my direct deposit paychecks and tips from that job and they all go to making additional loan payments. After a payment this week, I will have my undergrad student loan balance down to well under $8,000. If I hadn’t started this second job, my balance would likely be around $11,000. At this rate, I will wrap up my student loans in just a couple more months. It feels great! We will still have my wife’s loans to tackle after that, so the war is far from over. But winning the daily battle is how wars are won. Take heart! You can do this!