Understanding the Costs of Using Private Student Loans to Finance College

All across the USA, high school graduates and returning college students are making financial preparations in order to begin classes this Fall. It’s not going to be cheap as they will need to pay tuition, housing, food, books, transportation, supplies, computer, and other miscellaneous education expenses. With the average annual college cost for at a 4-year public institution of $16,300 ($33,300 for private), families are searching for ways to finance their student’s education without breaking the bank.

College aid programs, including scholarships and federal Stafford loans may cover a portion of the costs, but they cannot cover them all. Therefore, many students are now turning to private student loans to make up the difference.

There are plenty of lenders out there who are more than happy to lend you the money. Incentives and ad displays promising you all the money you need without having to pay anything until after graduation is one way that lenders lure borrowers. This sounds enticing, but are you certain that you understand the long-term costs with that decision?

Let’s run through an example:

Say that you borrow $12,000 for the year that includes your origination fee.
You use the money to pay any expenses not covered by your financial aid package. Likewise, you choose to defer repayments until 180 days after graduation.

The interest rate on private student loans is variable, meaning it can go up or down each month while you are in school and when you are in repayment. For this illustration, let’s say the rate stays constant at 9% for the next 48 months (the 4 years that you are in school):

Loan amount borrowed: $12,000
Annual interest rate: 9.0%
Deferment period: 48 months

By the time you graduate, the total amount of your loan will be approximately $17,177, which includes the original loan amount and the interest charges accumulated during the deferment period.

Now, let’s assume that you borrow the same amount to pay tuition, housing, books, etc., again in your 2nd, 3rd, and 4th years in school:

Sophomore Year: $12,000 borrowed
Junior Year: $12,000 borrowed
Senior Year: $12,000 borrowed

You have now graduated from college; you will have just 180 days after graduation before you must make the first payment on your loans. The repayment terms will be as follows assuming the interest rate was constant:

Loan Amount: $63,131 (this is the approximate amount of money borrowed that includes the amount of interest charges to the current loan amount during your deferment period).

Interest Rate: 9% (this is a variable rate that can change monthly. For this purpose, we will keep the interest rate constant).

Term: 240 months (you will have 20 years to repay the loan).

Monthly Payment: approximately $568.00


That is a pretty big monthly amount to make each month. But it may be okay for you considering the type of job you are able to get with your college degree, which can pay a lot more money per year than jobs not requiring a degree. Consider student lending as an investment into a great career; however, you need to understand the cost-benefits analysis for using private student loans to finance your college.

Now let’s consider the costs if you were to borrow the full amount to pay the total cost of education:

If the cost of education was $30,000 and you borrowed that full amount each year with deferred payments, your repayment structure would look like this:

  • Total amount borrowed including interest rate charges during deferment: $157,827
  • Your monthly repayment during 240 months with interest rate being constant: $1,420.01

If your cost of education was $40,000 and you borrowed the full amount each year with deferred payments, your repayment structure would like this:

  • Total amount borrowed including interest rate charges during deferment: $210,437.00.
  • Monthly repayments for 240 months with interest rate being constant: $1,893.35


Now who would want a $1400+ monthy payment as a graduation gift?  So be careful on the total amount that you will borrow. Only borrow the amount you need to cover the cost of education minus other college financial aid that you may receive. Also use our budgeting worksheet to plan your education costs as it can be a useful tool to help you keep higher education costs down.

For information about the SayStudent Private Student Loan, click here.

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