What Student Loan Debt Costs

Counselors, financial aid advisers, and parents urge students to borrow only what they absolutely need while in college. Many students disregard this as irksome nagging. But it’s good advice because what your student borrows will cost a lot more than what he or she gets.

Your student’s exact borrowing cost can’t be calculated ahead of time. There are just too many variables at play. Still, we can get a fairly close estimate by taking into account the typical behaviors of students who go into debt to go to college.

Your student will likely borrow Federal Direct Subsidized Loans and/or Federal Direct Unsubsidized Loans. These account for almost 90% of what today’s students borrow. They have the same interest rate – currently 4.29% — and repayment terms. But they’re very different.

The difference is how their interest accumulates. There is no interest on subsidized loans while your student is in school and in his or her grace period — 6 months that begin at graduation and during which payments are not required on his or her loans. On the other hand, interest on unsubsidized loans begins accumulating the day loan funds are issued to a student borrower. It keeps accumulating until the debt is repaid in full.

Federal law allows students to pay interest that piles up on unsubsidized loans while in school and grace, but most students can’t afford this or they choose to spend their money elsewhere. That’s a problem, because the law also permits the government to add unpaid interest to unsubsidized loan principal when the grace period ends. This is called “capitalization.” It inflates the loan’s principal which, in turns, causes more interest to accumulate on unsubsidized debt.

Let’s assume your student gets a degree in 4 years while borrowing $2,500 — $1,250 in subsidized loan and $1,250 in unsubsidized loan — when each of his or her 8 semesters begins. At graduation, your student’s principal amount is $10,000 for each type of loan, a total of $20,000. Also assume he or she repays the debt just as most students do — under what’s called the “standard” repayment option, which requires equal monthly payments for 120 months.

Here’s what the $20,000 your student borrowed ends up costing:




Principal borrowed before graduation




Interest accumulated while in school and grace period




Payments made while in school and grace period




Interest capitalized at end of grace period




New principal balance at end of grace period




Interest accumulated over 120 months of repayment




Total amount repaid




Cost of borrowing


41.81% 32.51%

There are other repayment options, but they all end up costing more. So your student really needs to:

  1. Borrow only what he or she needs;
  2. Minimize unsubsidized loan borrowing; and
  3. Pay unsubsidized interest while in school and in grace if possible.

College Affordability Solutions provides counseling and education on managing and repaying student loan debt. Call (512) 366-5354 or email collegeafford@gmail.com if you’re interested.

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