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How to Calculate Savings when Refinancing Your Student Loan


  • Originally posted April 15, 2022 for Kennethvincent.com
  • Migrated on 9/14/2033

Compound Interest Equation

So, you want to refinance your student loan and save some money. Great idea! Let’s do the math and see how much money you’ll actually save. First up, what’s the equation for this math? If you don’t care, feel free to skip to the free Excel download at the bottom. However, if you do care (And I do), here’s the equation:

P (1 + r/n)^(nt)

Where:

  • P = Principal 
  • 1 = We add 100% to the interest rate r. 
  • r = the interest rate as a decimal e.g. 3%= 0.03
  • n = number of times interest is compounded per t
  • t = time period

I needed some extra time to understand nt so let’s talk about nt briefly. n is the number of times interest is compounded per t (term), which means that if I had a loan that compounded interest monthly I wanted to calculate my annual interest payments. I’d make n = 12 (twelve) and t = 1 (one). 

For a very detailed explanation of the formula, head over to The Calculator Site; they also have some beautiful graphics. 

Principal

This is the full amount of the loan, not including any interest. That means this number represents what was borrowed. Not what is owed. It costs money to borrow money, so unless you’re paying in full, this number doesn’t represent the total paid. However, if you’re refinancing, and I recommend you do, this will probably be the amount that is refinanced, plus any outstanding interest payments. 

Interest Rate

The lending company charges this to use their money as a percentage. Usually, it is a percentage per year.

Term

How long you will be paying the loan? Typically, this number is represented in years. Also, usually the longer the term, the higher the interest rate and the lower the monthly payment. 

Payments

This is the amount you’re paying every period. 

Extra Payments

Anything over the minimum monthly payment. Making an extra payment is a great way to knock down your debt faster. When you make a regular payment, part of that money goes to interest, and part goes to principal. When you make an extra payment, 100% goes to the principal. 

Where to Refinance a Student Loan?

We used Earnest and I loved the experience. Honestly, the process was incredibly easy. The customer support has been wonderful. And everything syncs up with Personal Capital! This is a determining factor for me since I run everything through Personal Capital and YNAB

Downloads

Here’s a FREE Excel table I made for you to compare refinancing a student loan. Please let me know how I can improve it. Enjoy! Student-Loan-Refinancing-CalculatorDownload


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