Student Loan Amortization
What is Student Loan Amortization?
When we talk about student loan amortization what most people want to know is the amount of their monthly payment, how many years they have to make that payment, and how principal and interest is allocated toward the loan from each payment.
Variables
When determining the payment we must first determine the amount that you will owe, the interest rate, and the number of years you will be making the payment. From this we can extrapolate an monthly payment and an amortization schedule. For example, a $20,000 loan at 5% interest over 10 years will equal a monthly payment of $212.13 per month. The chart below shows how the payment changes each time you change one of the underlying variables of the amortization equation. The changed variable is highlighted in the chart with the payment changing each time a variable is changed.
| Loan Amount | Interest Rate | No of Years | Payment |
|---|---|---|---|
| 20000 | 5% | 10 | 212.13 |
| 15000 | 5% | 10 | 159.10 |
| 20000 | 6% | 10 | 222.04 |
| 20000 | 5% | 15 | 158.16 |
Amortization Schedule
The amortization schedule of the loan is simply a chart that shows how each payment of the loan is going to be allocated toward the principal and interest of the loan for each month. The way it works is that each month interest accrues on the loan and then a payment is applied to the loan. The interest is first subtracted from the payment and then the remaining amount is allocated toward the balance of the loan.
| Payment | Payment Towards Interest | Payment Towards Principal | Loan Interest Accrued | Loan Balance |
|---|---|---|---|---|
| Amortization Table | ||||
| $0.00 | $20,000.00 | |||
| 212.13 | $83.33 | $128.80 | $83.33 | $19,871.20 |
| 212.13 | $82.80 | $129.14 | $82.99 | $19,788.40 |
Notice how the payment stays the same, the interest is calculated monthly and the principal is reduced monthly by an amount equal to the payment minus the accrued interest. The interest calculation itself varies between lenders, for purposes of this example we used a 360 day year and a 30 day month for simplicity. Some lenders use a 365 day year and others a 360 day year, most all lenders use a 28-31 day month depending on the actual number of days in the month.
Student loan amortizations work exactly as does this example and the number of payments extends until the balance in the fifth column reduces to $0.00. Anytime there is an interruption to the schedule, for example if you pay a little extra toward the principal of the loan, then the entire amortization schedule will change. This is also the case if the underlying interest rate changes, if the loan term changes, or if a payment is missed. Once anything happens outside of the original schedule, in other words, anytime an underlying variable changes, the entire amortization schedule from that point forward changes.
It is important to note on this schedule that only $83 of the original payment is begin applied to the principal reduction of the loan. Should you want to pay an extra couple hundred dollars toward principal it would significantly change the interest calculations for payments from that point forward. This is the reality of all amortizations schedules, making extra payments toward principal accelerates the schedule and pays the loan off much faster than it would have been paid without the extra payment.
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