Why Online Student Loan Calculators Get It Wrong

Updated: Apr 10, 2020

There are an endless amount of online student debt calculators to help you understand and formulate repayment strategies and "what-if" scenarios. While these calculators can be useful for quick research, they fundamentally ignore some key features which results in inaccurate results. Before we dive into these issues, let's take a step back and ask a question: Why do so many people use online student debt calculators in the first place?

The Framework For Free Online Calculators

The short of it is that most online calculators are undoubtedly faster and easier to use than building out your own functions in Excel. Doing so would require you building formulas, formatting the spreadsheet, and typing in your loan information. Spreadsheets can take a lot of time and they require a tremendous amount of manual entry. Generally speaking, the average person wouldn't say one of their favorite things to do in their spare time is researching, building, and populating complex spreadsheets. Because of this, people tend to use these online tools without really knowing how accurate the information they're receiving is.

Most of these free websites create calculations based on variables like:

  • Time

  • Interest rates

  • Principal

These calculators can be very useful for giving you a general sense of how much your expected payment could be or how much you could save if you wanted to add a hypothetical $50 a month towards your loans. In addition, if you have previously consolidated your loans by refinancing, or only have one single loan, then a simple online calculator might be all that you need.

Problems with Online Financial Calculators

However, the truth is most people have multiple student loans and often from more than one provider. For example, someone might have six or seven federal loans serviced through Nelnet (or any other federal loan provider) and maybe one or two loans through a private provider.

Things can get even more complicated when you factor in different variables when managing multiple loans and/or multiple providers. To put it another way, when calculating the payoff date for multiple loans that have varied interest rates plus different monthly payments, it's understood this calculation would mathematically be different than calculating the payoff date for one loan with a single interest rate and a consistent monthly payment. Not just slightly different, but significantly different.

So generic calculators try to circumvent this issue by using methodologies like aggregating all of your balances together and taking the weighted average interest rate to give you a general idea of the results you're looking for.

Ask yourself, do you want to run the risk of trusting wrong information with your finances?

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