The PJ Tatler

College Loan Deal: Worse Than You Think

Bryan’s post, and the article it quotes, are understating the problem with Obama’s scheme, thanks to the magic of compound interest.  Let’s take little Suzy with her $212,000.  She takes a job at some appropriately socially-oriented inner-city public-service social worker position, and as a result only has 14,110  per year; we take 10 percent of that as her annual payment.  Current student loans are apparently at 8 percent.  So, her first year, she pays $1,411 against her loan — which cost $16,960 in interest. That’s about $15,549 over her payments.

Under the current terms of these loans, that excess is added to the principal. So, next year, we’re talking about the $212,000 principal, plus$15,549 added.  This is what people in the subprime mortgage business called “reverse amortization”.  Using the wonders of technology, I put that in a spreadsheet (see below).  The outcome is that really, when the loan is forgiven after 20 years, the total loss to the Government is $923,553, which is, not to put too fine a point on it, almost a million dollars!

Spreadsheet:

Year Payments Interest Principal Rate
0 212,000 0.08
1 1411 16960 227,549
2 1411 18204 244,342
3 1411 19547 262,478
4 1411 20998 282,066
5 1411 22565 303,220
6 1411 24258 326,066
7 1411 26085 350,741
8 1411 28059 377,389
9 1411 30191 406,169
10 1411 32494 437,252
11 1411 34980 470,821
12 1411 37666 507,075
13 1411 40566 546,230
14 1411 43698 588,518
15 1411 47081 634,188
16 1411 50735 683,512
17 1411 54681 736,782
18 1411 58943 794,314
19 1411 63545 856,448
20 1411 68516 923,553
28220