The other day, I was reviewing a Loan Disclosure Note for one of my client’s private student loans. The disclosure note has important information about a loan’s initial disbursement amount, the interest rate, the estimated finance charge (the amount of interest that accrues over the life of the loan), and the estimated total amount of payments that will be made once the loan is paid off. The requested amount for this particular loan was $30,000. Added to that amount were initial origination fees and finance charges, which brought the total initial disbursement amount to about $33,000. At an interest rate of around 11%, the Note estimated that the total amount of interest that would accumulate over the 20-year repayment period would be $101,000. At the conclusion of the 20-year repayment period, when the borrower will have paid off the loan, the total amount repaid would be somewhere around $131,000.

$131,000. To pay off a $30,000 loan.

I’m so used to these numbers as a student loan attorney that sometimes the absolute absurdity of this doesn’t really strike me. But I just had to stop and think about the ridiculousness of these numbers. $131,000, to pay off $30,000. Why does this happen? How is this fair? Well, it happens because of interest accrual, and while it’s not fair, it’s currently the way things are in the student loan world (at least here in the USA). This is very much “the norm.”

This is not an isolated case, either, and the problem is not limited to private student loans. According to federal budget documents, the federal government received $42.5 billion dollars in profits from federal student loans during the last fiscal year alone (check out this article for a good summary). It makes sense, when you consider the following:

Let’s say a borrower takes out $50,000 in federal student loans at a 6.8% interest rate (fairly standard overall, although higher than the current rates). Let’s say the loan is unsubsidized, so interest accrues while the borrower is in school for four years. This brings the loan balance total to about $65,000 by the time the loan enters repayment.

• On a Standard 10-year repayment plan, the borrower will pay nearly $90,000 in total payments to repay the loan in full.
• If the borrower is on an Extended 25-year plan, he will have lower monthly payments, but will pay over $135,000 to repay the loan in full by the conclusion of the 25-year repayment period.

This of course does not factor in periods of forbearance or default, which would substantially increase the total amount to be repaid even further. Either way, we’re talking at least a $40,000-$80,000 profit from a $50,000 loan. Mind-blowing.

This is the situation that millions of borrowers find themselves in, and while they struggle to make their payments and stay afloat, private and federal lenders reap enormous profits.