Why a Lower Monthly Payment on your Student Loans isn't Always Good

When you have a student loan payment to make, it can eat up so much of your paycheck that you think you'd do anything for a lower monthly payment. But is securing a lower monthly payment always a victory?

The math says no.

If you can afford your monthly payments on the standard repayment plan, you should, even if it is uncomfortable. Because of compound interest, the longer you wait to pay, the bigger your debt grows: in an exponential way.

That means that a payment made today is way more powerful at attacking your loans than the very same payment made a year from now.

Extended repayment plans lower your monthly payment, but in doing so, increase the life of the loan - usually from 10 years to 25 years.

And since compound interest makes time amplify debt, increasing the life of the loan can dramatically increase how much money it takes to pay back the loan overall.

Let's test this out: we'll put the same $30,000 loan with a 6 percent interest rate into the calculator at unbury.us. (Feel free to play along in another browser window.) The loan will be totally paid off in 10 years, so the monthly payment is $333.06.

Total interest paid in addition to the $30k: $9,695.95

Now let's do the same thing, but lower the monthly payment to $193.29 so that the loan takes 25 years to pay off.

Total interest paid in addition to the $30k: $27,324.95

The difference:  $17,629, about the price of a gently used Honda Civic, or a year of rent in a 3-bedroom house in Ohio.

Put another way, that's an average of $1175.26 for each of the 15 years you extended your loan repayment- 15 years worth of beach vacations.

So, if you desperately need to buy yourself some time in order to stay current, extended repayment is a good thing. But if there's literally anything you can do to keep up with your standard payment - like starting a side hustle or making a major lifestyle cut - it could well be worth the sacrifice.

How to Calculate it for Yourself

Considering extended repayment on your own loan? Run the numbers for yourself. It's easy, because internet calculators do most of the work for you.

If you don't already know the monthly payments you are trying to compare, head over to the loan calculator at Bankrate. Type in the amount of your loan, the interest rate, and the time period (10 years or 25 years). This will give you a monthly payment to type in at unbury.us. If you have monthly payments to compare already, skip this step.

Then, head over to unbury.us and punch in the numbers for each scenario. After you click calculate, check the text at the bottom where it says "interest paid".

It's Not Just True for Student Loans

This concept, of course, does not just apply to student loans.

I have a funny story about a friend of mine who was interested in purchasing a house. He stepped into a bank and told them he was shopping for a 15-year mortgage.

The banker came back with numbers for a 30-year mortgage.

"I'm sorry," my friend said, "But I am only interested in 15 year mortgages."

"It's not the term of the loan that matters, it's the monthly payment!" The banker chirped back. "Look how low this monthly payment is. Think of all of the things you can do with the extra money each month. You could buy furniture for your new house or go out to eat more often!"

Of course, my friend was no sucker: he knew why he wanted a 15-year mortgage. He thanked her for her time and walked out of the bank.

The dramatic in me almost wishes he had whipped out a calculator, calculated the extra cost of interest over the longer term (which naturally, would have all gone to the bank), looked her in the eye and said, "I SEE WHAT YOU'RE DOING." But I guess he's right, there was no need to be confrontational.

Don't get bamboozled into thinking that a lower monthly payment is automatically a good thing. Sometimes it's necessary to stay current with your payments, but if you've got the ability to pay faster, you always should.

Don't be afraid to run the numbers: with the amount of free calculators on the internet, there's just no excuse not to!



  1. Yeah this is why you have to watch out for things where they try to tell you like "get a new car and pay only $199 a month!" or whatever kind of deal it usually is. Like sure, $199 a month... FOR THE NEXT 50 YEARS! Dun dun dunnn!

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