Originally Posted by Roody
No, I said it right. If inflation is high enough, or interest rates low enough, the lender will lose money on an interest bearing loan. Obviously that means that the borrower will be making money. If I borrowed $100 from you at 10 % interest, I would owe you $110 a year later. But if inflation was 20%, the $110 would be worth only $88, in terms of purchasing power, and I would have made a profit even after paying interest.
Wow, a 20% inflation rate in just one year! I think if inflation was that crazy, paying off a student loan would be the least of your worries, because that kind of inflation would definitely drive an economy into a pretty good recession, maybe even a depression. More realistically, inflation tends to grow at more reasonable rates, such as 2.4% from one year to the next. As a general rule, interest rates are higher than the inflation rate, because the banks use higher interest rates to keep the inflation rate in check. Thus, a scenario such as you describe is unlikely.