# How to Calculate Student Loans

Are you considering getting a student loan? Do you have one already and happen to be considering your alternatives? You will be well-advised to use a loan calculator. This will allow you to determine the size of the payment you can live with – and we highly recommend you try not to underestimate how much misery loan payments can bring you.

## How to Use the Calculator

We somewhat arbitrarily took \$200 as the maximum monthly payment that would be tolerable. This number is based upon our own experience and what we’ve observed. Note that the payment schedule is for ten years. Considering what we’ve said about leverage, if you have a good job, it can make sense to make your payments over this long, or even longer, a period. But we hated every minute of ours, and the world is unpredictable, so the longer period exposes you more to the risk of losing your job or other changes. You could sign up for a longer period and make extra payments, and that is what we did.

In any event, in the example above, we chose \$200 as the monthly payment, a 9% interest rate, and a ten year period (120 payments) and clicked on “calculate.” The calculator returned the “Loan Amount = \$15,788.34” And so we know that we could not get a loan larger than that, on those terms without exceeding the \$200 per month payment.

What if we could get a better interest rate, though? Suppose we got an interest rate of 5%? That seems almost free compared to the rates for credit cards! How big a loan could we get without going over our \$200 payment ceiling?

As you can see, that yielded a loan total of \$18,856.27. As we point out in our Student Loan Report, that’s about a fourth of the cost of one year at Harvard or Yale. So what if you ignored our warnings about length of payment schedule and went with a repayment period of 20 years (this would likely be half of your entire work life, so we almost hate even to mention it). How much could you borrow then?

We made the change by changing number of payments from “120” to “240.” In other words, you can borrow \$30,305.06 if you agree to repay for twenty years. That’s still less than half a year’s cost of the Ivy League Schools, and under a year’s out-of-state tuition for most state universities. So let’s flex one last time, and consider doubling our acceptable payment amounts to \$400 per month for twenty years. That’s way too much, in our opinion, but here are the calculations:

With a simple rate of interest, doubling the payments allows you to borrow twice as much. And so, for the price of \$400 per month for twenty years, you can almost afford a year at an Ivy League school.

We deliberately presented the  information this way so that you would feel every cent and every minute. It is our belief that there are almost no circumstances where agreeing to anything like this makes sense. To see the real-life calculations facing the plaintiff (bankrupt person) in the Hixson case we refer to in our article on repaying student loans, please read A Case Study: The Choices Facing Hixson. In Hixson, the student got out of school with approximately \$100,000 in debt and no job in his subject. It’s a pretty sad tale, but every person contemplating a student loan should consider it.