Over 40 million Americans have student loan debt. For a majority of these people, it will take over a decade to pay back those loans under the current terms outlined by the lender. Student lenders benefit the most from high principal balances combined with high interest rates. The longer the principal balance stays high, the more interest can add up on the outstanding loan. Paying down these loans is difficult if most of the monthly payment goes to the interest rather than the principal.
If borrowers can make larger monthly payments to their principal balance, this will knock back the total amount owed on the loan and thus reduce the total time it will take to pay back the loan. However, it's pretty clear no student lender wants you to pay off your loan faster because the longer you have a balance, the more interest income a lender will make.
What are pre-payments and why do student lenders hate them? Pre-payments are a monthly payment made to your loan in excess of the minimum required by the lender. For example, if the lender requests $200 per month as a minimum payment, and you pay $300, you are making a pre-payment of $100 ($300 total payment minus $200 required by lender). The $100 in excess of the minimum required makes lenders scream because that reduces the pot of money that sits there collecting interest.
Borrowers need to be cognizant of what pre-paying a loan will do for their financial future. Say you have a monthly payment of $200 for 10 years. If during the first month of the repayment period the borrower makes a pre-payment of $100 in addition to the $200, that pre-payment can save the borrower a lot of money over time. In fact, if the $100 sits there earning interest over the life of the loan repayment, say one decade, and the borrower is responsible for 8% interest on their loan, that translates to $149 in accrued interest after ten years (and $249 combined in principal and interest owed to the lender). Imagine making a pre-payment of $100 per month over the life of the loan every month. That's some serious savings over the long term and actually that would allow you to make a major dent in the total time it takes to pay off your loan.
GradFin was created to think differently about your future loan payoff timeframe - we are encouraging borrowers to make pre-payments on their loans. In fact, GradFin allows borrowers to tap their network (parents, employers, etc.) to help them make pre-payments on their loans, thus enabling these borrowers to pay back their loans much faster. If your employer makes $100 or $150 payments to your loans, in addition to the loan payment you are making each month, this has the ability to knock back the total months and even years it will take to help you pay off your loan. Plus, GradFin will reduce borrowers interest rates in an effort to help borrowers reduce the total interest they will eventually owe.
Imagine a future where you as a borrower will be out of debt faster. Not months, but years faster. We are going to work hard here at GradFin to make this possible for borrowers. Our mission is to find private sector solutions to allow borrowers to pay back their loans faster.
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