Compound Interest: Tool or Weapon

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.