# 25% of my student loan payment just went to interest

With 2018 in the rear-review mirror, I took the time to think about where I want to be this time next year. Unlike previous years where my resolutions span far and wide,** this year my goal is singular: pay off $170,000 by the end of 2019**.** **My original timeline has a zero-balance date of March 2020, but I think I can push the needle and really pay this off beast off in 2019. The first step? Make each month’s minimum required payment, followed by massive principal-only payments. For January 2019, the required minimum payment is $862.56. This month I’ll actually make 2 payments totaling $2002, because when all of the loans enter ‘repayment’ status (in February 2019), $2002 is actually the required minimum payment in the US Department of Education’s 10-year standard repayment plan — yikes! For this post, let’s focus on payment 1.

Unlike previous payments i’ve made while in deferment, payment 1 represents my first *mandatory* minimum payment and therefore isn’t focused on a single loan group: my loan groups B,F,G and I all exited deferment this month and have minimum payments for January 2019 which in aggregate represent $862.56.

If you have student loan debt, you need to be able to understand **how** each payment actually impacts the principal reduction, and the role interest plays. For me, loan groups B,F,G,I represent approximately 70% of my current payoff balance as outlined below. It’s mind-numbing to think that a payment as large as $862 only produces a 0.5% principal reduction, which reinforces the idea that **the only way out of student loan debt is to make massive principal only payments!**

## Did my balance actually go down?

The most practical way to measure the actual progress of your student loan debt payoff schedule is to track the **current balance** on any given day *hope* that this number is actually going down (sarcasm)! Your loan statement has alot of numbers which can be confusing: outstanding balance, principal balance, interest accrued, outstanding principal balance, current balance, and so on. It doesn’t need to be this complicated, although you should know the difference in principal vs interest, your at-at-glance value to measure your progress is always **today’s current payoff balance**. This number is how much you have to pay the U.S Department of Education **right now** to get them out of your life and get your balance to 0. You can see that by comparing my current balance from 1/2/18 to the current balance of 1/6/19, the *net impact* of this $862 payment only produced a reduction of $190.16.

One interesting observation is that the $862 payment only produced a net reduction of $190.16 to the current balance, despite $643 being applied to principal. I had to dig into this and actually reached out to the US Department of Education to understand why — the answer is accured interest which is capitalized applied to principal.

When you’re in school. interest accrues daily on your loan including times when a payment is not required to be made on a loan such as deferment, forbearance, grace, and in-school statuses. Accrued interest is capitalized (**added to the principal balance**) when the loan goes into repayment thereby increasing the total outstanding balance due and the amount of interest which accrues daily. Because interest continues to accrue on the principal balance, any future interest that accrues after capitalization **will be based on the new outstanding principal amount** (previous principal balance plus capitalized interest). Therefore, capitalization increases the total cost of your loan.

Guess what happened in January 2019? All 6 of my loan groups entered repayment status, and the accrued interest was capitalized (added to the principal balance). With all loan groups now in repayment status — im able to more accurately predict how much interest will accrue daily, and as a byproduct of that, the overall anticipated principal reduction each payment. As of January 6th, 2019 my current payoff balance is $163,920.15 which accrues daily interest at a rate of $27.19. Thanks Uncle Sam!