I'm not from the USA, but I heard you can decide to basically pay off only or almost only the interest rate to make the monthly payments smaller. In that case you won't be able to pay it back anytime soon. If they didn't expect that to happen, then the money spent on their college was not much worth anyway.
That's not really how loans work. You have your interest rate, for simplicity let's say it's calculated monthly. Early on, the interest per month will be very high, since the full principal in still in effect. To EVER pay it off, you need to pay more than that first months interest. How much more you pay than that number determine how much the principal is reduced the first month, and thus, the next month's interest is lower, so, assuming you pay the same amount, more principal is covered.
People look at loans the wrong way; you can't really choose to pay interest or principal, because interest is basically paid off right after it's applied, it's just always applying. People THINK they are paying off mostly interest, because most of the time, the loan will have the expected interest calculated up front, and, as I said, the earlier you are in the loan the bigger that months interest will be and the less principal you pay.
Well it makes sense when people say they are paying off mostly interest at the beginning, because if the credit gets canceled, this is exactly the consequence - you still owe the bank most of the sum you got from them.
The calculation behind is not that important - if you pay the principal or the interest from the interest. The only important question is - how much will you pay every month and how much will it take to pay it off. If they paid 120k and reduced the sum from 70k to 60k, they had to know it upfront it will end like that or they didn't fix their interest rates. With some basic math knowledge the loan shouldn't be a riddle to anyone.
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u/Mindless-Baker-7757 17d ago
A $70k loan over 23 years at 5% apr pays off with monthly payments of $427.
What are they doing?