A major chunk of a student loan is the interest. The interest is how the loan servicer makes a profit on lending. The interest is calculated as a percentage of the loan amount and will accrue daily. The interest is paid back in addition to the initial amount until the loan is paid in full.
Review the differences between these two examples of a $20,000 loan with a 5% interest rate.
Please note these examples do not take into account any interruptions or changes in repayment, no late fees, and no interest rate changes; these and other factors could change (increase) the repayment amount.
Interest also plays a role in which repayment plan you select. For instance, on the Standard Repayment Plan, you have ten years of fixed payments vs. the Extended Repayment Plan, where you have 25 years to pay.
The rule is that the shorter the payment plan is, the less interest added to the life of the loan.
Your monthly payments might be more, but you save almost $10,000 in interest by paying back in 10 years. Also, making additional payments or paying above the minimum amount is a helpful approach to save on interest payments over time. (see Making Principal Payments on Student Loans)
