Student Loan Interest has Topped $40 Billion a Year

As we wait for 2016 Q4 numbers on student loan debt to come in, it might be interesting to take a look at the current amount of interest being accumulated on current student loan debt.

For a little over $1.3 trillion of student loan debt, it costs borrowers just over $40 billion a year based on a 5.25% interest rate and 14 year average repayment term. That rate is generous for many borrowers and slightly over what some Federal borrowers are paying.

To put that in perspective, the nation collectively spends more than $510 billion in college attendance costs per year. Most of that burden falls to state governments with student loans, grants, scholarships and student out-of-pocket costs making up the rest. We are collectively paying 8% of what it costs to send everyone to college in interest payments only.

With the student loan debt total projected to hit $1.5 trillion in 2018, it does not look like the amount of interest being paid is going to go down anytime soon. Even though the total number of college students is down from it’s 2010 high, enrollment numbers will likely rebound by 2020, meaning we may be little more than a stone’s throw away from owing $2 trillion in student loan debt.

The Federal government does offer several options for income-based repayment plans, though you will end up paying more over the lifetime of the loan, but it is a much better alternative than defaulting. A defaulted student loan will have a huge effect on your credit score, making banks and credit card companies hesitant to lend to you or give you a line of credit for at least a couple of years.