For some, compound interest may be a new term and a new concept. However, for students in college, it is crucial that this daunting term is understood. Simply put, compound interest is the additional amount of money that is added to an already existing balance. Compound interest can either work for or against students depending on whether they are borrowers or investors.
According to Student Loan Hero, the average 2017 College Graduate will graduate with $37,172 in student loan debt. For these loans, interest will accrue and compound as time goes on, which makes the amount of debt increase even though payments are being made. Now, if a student is on a 10-year repayment plan for that amount with a 6.24 percent interest rate with a minimum monthly payment of $417.18, a total of $12,889.56 in interest will be paid towards the loan at the end of the 10-year repayment period. This means, in the end, $50,061.56 will be put towards student loans.
While this may seem intimidating, there are ways to help reduce the amount of interest being paid. First, put money toward the loan before the repayment begins. That money will be put directly towards the principal, which is the amount before interest is added. Also, when making a payment, paying more than the minimum due can help reduce the principal faster.
Compound interest is not all bad and can actually be used to earn money as well. Opening up a savings or investment account with a high interest rate will allow for students to earn more money in the long run. It may seem early to start putting money into an investment account, but the earlier the better. Interest will start accumulating sooner and the investment will grow on its own.
When people put money into a bank or an investment, the bank is using that money for various investments. So, in return for putting money into the account and keeping it there, banks will pay the account back with interest.
The key with compound interest is time. The earlier people begin paying toward their debt or the earlier they start investing, the more money will have in the end. Compound interest can be utilized as a tool to earn more money or it can be a weapon that drains the account.