This caught the attention of the NGPF Team this afternoon. Anytime I see headlines like this with details about loan amounts, interest rates, monthly payments, I wonder “Can I replicate this in a spreadsheet?” (Here’s another example of a spreadsheet created to show how a janitor could leave an $8 million estate). One of the key questions that your students might be curious about is “How did a $68,000 loan turn into $113,000 in payments, especially since it was paid off in only 7 years?”

Here’s the spreadsheet that I created

Let’s unpack this mystery. First, how I derived my assumptions from the article about Jessica B:

The first two years of college were completely free through academic scholarships in my hometown of Gulf Shores, Alabama. I moved to Nashville in 2007 and borrowed $68,545.00 to attend Belmont University for the remaining two years of my degree. That total was made up of six different loans: four private and two federal. The federal loans combined only made up of $10,000 of the overall total and their interest rates were 6.0% and 6.8%. The private loans ranged from 8.25% to 10.75%.

I took this fact pattern and made the following assumptions:

• She took out loans of $17,000 in September 2007, January 2008, September 2008 and January 2009.

• Since most of the loans were private loans, they would be accruing interest WHILE she is in school. In fact, if you add up the INTEREST (column E), you will see that she accrues over $10,000 in interest before she is due to make a payment.

• In December 2009, she had to begin making payments on her student loans (standard terms are that payments must be made starting 6 months after graduation or dropping below a certain number of credits). She makes the fateful decision to make INTEREST ONLY PAYMENTS. Here’s why:

“Upon graduation, Sallie Mae gives you an option to choose an interest only payment plan; this is appealing as it greatly reduces your monthly payment. You can only be on this payment plan for a maximum of four years throughout the life of the loan. Everyone I knew was on this plan after graduation. Hilarious how we all thought Sallie Mae was cutting us some kind of break.

• In January 2013, she begins to aggressively pay down her student debt using the following methods:

“Although I studied the approach of other financial advisors, I ultimately landed on Dave Ramsey’s Snowball Theory (check out this NGPF Activity on High Rate vs. Snowball Techniques to pay down debt). I agreed with the math behind Suze Orman’s Avalanche Theory (pay the highest interest rate first regardless of the principal), but ultimately it was the behavior behind Dave Ramsey’s approach that made me choose his in the long run. In the very beginning, I practiced the Avalanche Theory: the first loan I paid off was the private loan with the highest 10.75% interest rate. I did this as it carried the smallest principal out of the other 3 private loans. I knew once I got the only double digit interest rate loan I had knocked out, I could breathe a little easier and start the Snowball.”

• According to the article, in November 2016, she paid the last of her student debt off.
  • Note that in my simplified example, she still had about $3,000 to pay off. I chose to make a simplifying assumption about an average interest rate (of 8.5%) while her situation was more dynamic as her rate fluctuated as she paid off loans with different interest rates. Private loans also tend to be variable rate loans that adjust based on an index (this was a particularly placid period of low rates that stayed low). I still got within a month or two of her paying it off which is close enough.
  • The attached spreadsheet shows TOTAL PAYMENTS (column D) of $110,000 vs. $113,000 from the headlines.

Why I like this example:

• I love spreadsheets and how they elegantly demonstrate the consequences of decisions.
• Demonstrates the cost of interest on student loans that accrue during college. I was surprised at first by the $10,000 in interest that she accrued in just over two years. Just because you don’t have to make payments doesn’t mean your loan balance isn’t GROWING. Makes those federally subsidized loans that much more valuable.
• Just because a lender offers you an interest-only option to keep your payments low doesn’t mean you should take it. While Jessica’s loans were in interest-only mode, she racked up $20,000 in interest expense and DID NOT PAY DOWN $1 OF HER PRINCIPAL.
• Provides different techniques to pay off debt.
• Vividly demonstrates that it’s not the original amount of your loan that matters (in this case, $68,000) but rather how much you ultimately pay ($113,000). The sooner you can pay down principal the better off you are.
• Spreadsheets allow you to create alternative scenarios
  • On the second sheet of the spreadsheet, I did an analysis of Jessica’s loans assuming a standard 10 year repayment starting in December of 2009 to see how much her ultimate cost would have been. You will have to check it out to see the answer!

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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