How your student debt keeps growing, even when you keep paying

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How does a graduate student loan balance get out of hand, despite years of fair payments?

A series of Wall Street Journal articles explored how some private colleges charge six-figure sums for graduate degrees that lead to low wages, and how limitless federal loan programs lead to extremely high debt.

After graduation, a large and growing percentage of graduate students adhere to repayment plans that tie monthly payments to their salaries, according to the Congressional Budget Office. But often these payments aren’t even enough to cover the interest, which means the overall debt continues to grow.

We put you in the shoes of a graduate starting a two-year master’s program in 2021 that costs $ 100,000. In this scenario, you earn an adjusted gross income of $ 65,000 after graduation.

Methodology

This is only a simulation; other calculators could make different assumptions and give different results, according to student loan experts surveyed by the Wall Street Journal. The Journal simulated a scenario where loans are disbursed in August and January over two years. For each disbursement, we calculate the daily interest rate on the loan and the number of repayment days to determine the accrued interest.

Our borrower starts repaying in November 2023 and reaches 25 years of payment in 2048. The borrower’s annual payments are set based on the previous year’s tax returns, so the person’s income is artificially low for the first two years of payment. We assume that income increases by 4% per year; the poverty level increases by 2.5% in our scenario. This analysis does not take into account the suspension of payments and interest during the pandemic, nor does it take into account similar freezes that may occur in the future.

Our borrower is single and has no children. A different repayment plan, such as Pay As You Earn, might be better for another borrower. It also assumes that our borrower does not have to forbear. If this happens, all unpaid interest – at times in the tens of thousands of dollars – is capitalized and is added to principal.

Income tax brackets are subject to change over the next several decades, so our borrower’s actual tax bill may differ. This tax estimate does not take into account deductions other than the standard deduction.

The new student debt crisis

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