Tuesday, May 10, 2011

The long and short term costs of loans

Let's say that I take some amount of loans out for just my second year of the MBA program.  The loans have only one year to accrue interest in school and I can take out a max of $8,500 in subsidized and $12,000 in unsubsidized Stafford loans and the rest can only be PLUS loans.  This isn't entirely accurate as it ignores the private student loan market, but let's accept it as a simplified worst-case scenario.

Loan Amount Loan type & rate Interest per year Fees At graduation Payment Total paid
$8,500 Sub. Stafford 6.8% $0 1% $8,585 $99 $11,856
$29,000 above + Unsub Stafford 6.8% $816 1% $30,106 $346 $41,575
$50,000 above + PLUS 7.9% $2,475 4% $53,605 $630 $75,617
$65,000 above + PLUS 7.9% $3,660 4% $70,390 $833 $99,971
$82,349 above + PLUS 7.9% $5,031 4% $89,803.53 $1,068 $128,113

That ends up being pretty expensive over time!  Even with no interest during school and a 1% loan fee I'd pay 39% more by financing the $8,500 instead of finding another way to pay for it.  At the high end, you more than 55% more by financing the entire student budget.  Of course sometimes you don't have the cash to pay, but over $20,000 of the student budget is living expenses.  This makes a really good case for living cheaply.  Going out for drinks is no longer a good deal if your $20 bar tab becomes $30.  Similarly, while I might pay $30 for a dinner out somehow $40 doesn't seem as reasonable.  With that math I'm not sure how anyone can justify financing living expenses.  Just another reason for me to stick to my guns and take on as little debt as possible.

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