Tracking a Student Loan with GnuCash

I recently received an inquiry here from a reader interested in using GnuCash to track his student loan. Here is the text of that email:

Can you help with tracking student loans in GnuCash?

Every month when I pay my student loan I credit my Bank Account for the payment amount $100 I then debit the Loan payment Expense account for the same $100. But how can I track and reflect how much of my Liability has been covered and how much Education Liability i still have to be paid?

Thank you so much once again for your great blog!

Well first off, thanks for the compliment on the blog. (You know I just couldn't cut that part off the end of his message.)

OK, let's illustrate what happens when you apply for and receive a student loan from your bank. Let's say you apply for and receive a $10,000 loan. The first thing you do when you receive the loan is deposit the money in your checking account. In GnuCash this is reflected in two places. The checking account sees a balance increase equal to the loan amount of $10,000. At the same time you need to create a liability account with an equal $10,000 balance. This represents the principal of the loan you must repay. Here's how this looks graphically:

OK, now that the money is in our checking account, it's time to pay for tuition. When you write a tuition check for $10,000 the transaction is recorded in GnuCash as a debit to your checking account, thus decreasing the value of an asset. The transaction is also recorded as a credit to an expense account I've called Tuition Expense. In GnuCash, the Student Loan has now been received and spent. Here's how that tuition check looks in GnuCash:

Now comes the tricky part. They did tell you life gets more complicated after you graduate, right?

Every time you make a payment on your student loan, part of that payment goes to the bank in the form of interest on the loan and part goes to repay the principal on the loan itelf. Recording a student loan payment in GnuCash looks like this:

The $100 loan repayment check you write and send to the bank is recorded in GnuCash as a debit on your checking account, which is a cash based asset. In GnuCash you must also record two offseting transactions representing the portion of the payment which goes toward principal and the portion that goes to interest. For example, your next $100 payment may look something like this in GnuCash:

$100 debit to Assets:Checking $10 credit to Liabilities:Student Loan $90 credit to Expenses:Interest

As always, credits and debits on any transaction must balance.

How do you get the $90 / $10 split? Those amounts are the loan ammortization amounts. You can find them on every bank statement the bank sends you.

Source: http://www.myinvestmentblog.com/tracking-student-loan-gnucash

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