How We Calculate Student Loan Payments

One feature of Climb Credit loans is that several of our products involve initial, interest-only (“IO”) payments before full-repayment begins. However, many of you may be wondering how we calculate student loan payments. Sure, you can just put your information into an online calculator or accept what’s written on your disclosures.

But we want to make sure our borrowers really understand everything they may want to know about their loan — and where the numbers come from. So if you’re interested, we’ve got a rundown of the equations used to get your monthly student loan payments!

Note: we apologize in advance for any stress caused by flashbacks to high school math class.

If your loan product has initial IO payments, your first months will consist of lower payments which include only the interest portion of your loan. Fortunately, these payments are fairly simple to calculate. To do so, you would start with the principal (P). This would be the amount you’ve financed in tuition and living expenses, plus any origination fee — let’s assume an origination fee of 5%:

P = financed amount + (financed amount x .05)

Then, you multiply P by your effective interest rate (J) to get your monthly IO payments:

Monthly IO Payment = P x J

P = principal amount
J = effective interest rate (annual interest rate as decimal / 12)

So, if you take out a $5,000 loan (which includes a $250 origination fee), your principal would be $5,250. Let’s say you receive a 9% interest rate; your effective interest rate would be .0075, and your monthly IO payments would then be $39.38!

P = 5,000 + (5,000 x .05) = 5,250

J = .09/12 = .0075

Monthly IO Payments = 5,250 x .0075 = 39.38

Now it’s when we get to the principal+interest (“PI”) payments that the calculations get a bit trickier. Here’s the basic formula for how the monthly payments are calculated:

Monthly PI Payments = P x ( J / (1 - (1 + J)-N))

P = principal amount
J = effective interest rate (annual interest rate as decimal / 12)
N = total number of PI payments (does not include payments made during the IO period)

So, let’s go back to the $5,000 financed amount with a 9% interest rate, and say you have three years of PI payments. P is still $5,250, J is .0075, and the total number of monthly payments would be 36.

And now, we can put these numbers into the formula:

Monthly PI Payments = 5,250 x ( .0075 / (1 - (1 + .0075)-36)) = 166.95

It should also be noted that the total amount you end up paying for the loan is dependent on if you make the minimum payment each month. Should you miss or be late on a payment, your interest will accrue, and you’ll pay more over time. Alternatively, with Climb loans, there is no prepayment penalty, so if you pay more than the minimum, you’ll ultimately pay less in interest!

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