Understanding Maths To Pay Off Student Loans Quickly

Getting an education is super important, but student loans and repaying these loans can make this journey a bit overwhelming. The good news is that knowing basic maths concepts helps in understanding how you can repay your loans easily.

In this article, we will discuss some maths concepts to make student loans less confusing. It covers essential terms like fixed and variable interest rates, subsidies, margins, drawing power, outstanding amounts, arrears, and many more, as well as strategies like the avalanche and snowball methods.

Important Terms And Basics

Before discussing student loans, let’s know the basics.

>> Fixed Interest Rates: This is like having a set price. Your interest rate stays the same for the whole loan. For example, if you borrow ₹1,00,000 at a fixed rate of 5%, you'll pay ₹5000 in interest each year.

>> Variable Interest Rates: This is like a price that can change. The interest rate on your loan can go up and down. It's usually tied to something like the economy.

>> Margin: This is like the down payment on a house. It's the money you must pay upfront for your education. Generally, If you borrow more than 4 lakh, you have to pay 5% of it yourself, and the rest, which is 95%, will be covered by your loan. So, if your college fees are 60,000, you'll pay 3,000 from your savings, and the remaining 57,000 will come from the loan.

>> Credit Score: The Credit Information Bureau of India Limited (CIBIL) score is a three-digit (300 to 900) numeric representation of an individual's creditworthiness. It is used by financial institutions and lenders in India to assess the credit risk associated with potential borrowers. A higher CIBIL score indicates a stronger credit profile and a lower credit risk, making it more likely for a person to qualify for loans and credit products.

>> Subsidies and Grants: These are like gifts to help you pay for your education. They can make a big difference in how much you have to borrow. For example, the Central Sector Interest Subsidy Scheme (CSIS) is a government initiative in India aimed at providing financial assistance to economically disadvantaged students pursuing higher education.

Under this scheme, eligible students can benefit from an interest subsidy during the moratorium period which typically spans the course duration plus one year or six months after securing a job, whichever is earlier. During this period, the government pays the interest on the education loan on behalf of the student.

>> Drawing Power: This is the maximum amount a borrower can withdraw from their education loan account at any given time. It's essentially the limit set by the lending institution, indicating the maximum funds available for educational expenses.

>> Outstanding Amount: This is the total sum of money you owe to the lender, including the principal loan amount and any accrued interest. It represents the remaining balance of your education loan. A high outstanding amount can be a red flag, indicating higher debt levels.

>> Arrears Amount: This amount refers to any payments that are overdue or have not been made on time. In the context of education loans, this would be the sum of missed or late loan payments. Missed or late payments can result in a lower credit score and make it harder to secure credit in the future.

>> Loan Tenure: The loan tenure is the duration within which you're expected to repay the education loan. Longer tenures result in smaller monthly payments, while shorter tenures require larger payments but result in lower overall interest costs.

>> Co-Signer/Guarantor: A co-signer or guarantor is a person who legally commits to paying your education loan if you default. Lenders may require a co-signer, especially if the borrower has a limited credit history or income.

>> Loan Delinquency: This occurs when you fail to make payments on your education loan for an extended period, usually 90 days or more.

>> Amortisation: This is a fancy word for how your loan payments work. It's like a schedule that shows how much of your monthly payment goes toward paying off the loan and how much is interest. It helps you see how your payments change over time.

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Strategies For Repaying Loans

With a solid understanding of loan structures and amortisation, borrowers can use various mathematical strategies for efficient loan repayment.

>> Avalanche Method: The avalanche method is a debt repayment strategy that focuses on paying off the loan with the highest interest rate first. To illustrate this method, let's consider the following scenario:

Suppose Sarah has three student loans with the following details:

• Loan A: 1,00,000 at seven per cent interest

• Loan B: ₹80,000 at five per cent interest

• Loan C: ₹50,000 at six per cent interest

Let's consider the total number of monthly payments (n) = 120 months

E = P*r*[{(1 + r)ⁿ}/{(1 + r)ⁿ-1}]

Where

• E = monthly EMI

• P = Principal amount

• r = monthly interest rate

• n = number of months

For Loan A:

Monthly interest rate: r = (7% / 12) = 0.5833%

Monthly Payment (Loan A)

= ₹1,00,000*0.005833*[{(1 + 0.005833)¹²⁰}/{(1 + 0.005833)¹²⁰ - 1}]

Monthly Payment (Loan A) ≈ ₹1,164.19

For Loan B:

Principal Loan Amount (P) for Loan B = ₹80,000

Monthly interest rate: r = (5% / 12) = 0.4167%

Monthly Payment (Loan B)

= ₹80,000*0.004167*[{(1 + 0.004167)¹²⁰}/{(1 + 0.004167)¹²⁰ - 1}]

Monthly Payment (Loan B) ≈ ₹899.75

For Loan C:

Principal Loan Amount (P) for Loan C = ₹50,000

Monthly interest rate: r = (6% / 12) = 0.5%

Monthly Payment (Loan C)

= ₹50,000*0.005*[{(1 + 0.005)¹²⁰}/{(1 + 0.005)¹²⁰ - 1}]

Monthly Payment (Loan C) ≈ ₹550.57

So, using the avalanche method, Sarah's monthly payments for her student loans would be as follows:

• Loan A: ₹1,164.19

• Loan B: ₹899.75

• Loan C: ₹550.57

She would prioritise paying off Loan A first, followed by Loan B, and then Loan C, as it minimises the total interest paid over the life of the loans.

>> Snowball Method: The snowball method prioritises paying off the loan with the smallest balance first. This method not only reduces the number of loans but also provides a sense of accomplishment as each loan is paid off, which can be psychologically motivating for the borrower.

>> Income-Driven Repayment Plans (IDRs): This involves complex mathematical calculations to determine monthly payments based on income, family size, and other factors.

Monthly Payment (IDR) = (AGI - Poverty Guideline) x Repayment Factor

Where:

• AGI (Adjusted Gross Income) = borrower's income after certain deductions.

• Poverty Guideline = Poverty Guideline for the borrower's family size.

• Repayment Factor is a percentage based on the specific IDR plan.

Suppose Maria is considering the Income-Based Repayment (IBR) plan. Her AGI is ₹40,000, and the Poverty Guideline for her family size is ₹30,000. The Repayment Factor for IBR is 15%.

Monthly Payment (IBR) = (₹40,000 - ₹30,000)*0.15

Monthly Payment (IBR) = ₹1,500

So, under the IBR plan, Maria's monthly payment would be ₹1,500 based on her income and family size.

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Maths helps you understand interest rates, loan types, and repayment plans. Plus, it's crucial to know about subsidies, grants, and other financial aid that can make a big difference. By understanding these mathematical concepts and applying them to your daily life, you can take control of your student loans, budget wisely, and work towards a debt-free future.