Loan Capitalization

[gogiantsss]

I think an important thing to note is that interests starts incurring on unsubsidized loans the moment the money is distributed. Having said that, does anyone know how to calculate loan capitalization so I can know a "true cost of attendance"

lets say for this example, $200,000 for projected cost of attendance by the school.

Thanks to all those finance savvy people out there!

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[Doctor Bagel]

Interest does start accruing on the government unsubsidized loans, but it isn't capitalized until you start repayment. That's a pretty nice break for all of us. Since the interest isn't capitalized now, you can calculate it just by multiplying the loans times the interest rate.

 

[yadayadadude]

You can figure this out just as easily as I can, but roughly:

If you borrow $50k the first year, I assume that's $8500 subsidized Stafford, $30K unsubsidized Stafford and $11500 in GradPlus. I also assume your cost of attendance increases each year by 5% and that amount is pure GradPlus. So, from your MS1 year, you have $30K accruing interest at 6.8% for four years and $11500 accruing interest at 8.5%, also for four years. For the MS2 year, it's $30K at 6.8% and $14000 at 8.5% for three years. This isn't precisely accurate, since you don't borrow the entire amount each year in September, but it's probably close enough. Using the above logic, you'll owe $248K when you graduate.

If you enter forbearance during a three year residency, you'll owe something like an additional $47K, bringing your grand total to $295Kish when your finish residency, capitalize your interest and begin to pay back your debt.

I have no idea why I just did all that work for you.

 

[Doctor Bagel]

You can figure this out just as easily as I can, but roughly:

If you borrow $50k the first year, I assume that's $8500 subsidized Stafford, $30K unsubsidized Stafford and $11500 in GradPlus. I also assume your cost of attendance increases each year by 5% and that amount is pure GradPlus. So, from your MS1 year, you have $30K accruing interest at 6.8% for four years and $11500 accruing interest at 8.5%, also for four years. For the MS2 year, it's $30K at 6.8% and $14000 at 8.5% for three years. This isn't precisely accurate, since you don't borrow the entire amount each year in September, but it's probably close enough. Using the above logic, you'll owe $248K when you graduate.

If you enter forbearance during a three year residency, you'll owe something like an additional $47K, bringing your grand total to $295Kish when your finish residency, capitalize your interest and begin to pay back your debt.

I have no idea why I just did all that work for you.

Editing to add that I am stupid today (and yesterday). Interest doesn't accrue on the interest, but the capital amount of each loan is accruing interest. So yeah, what you said.

 

[yadayadadude]

Editing to add that I am stupid today (and yesterday). Interest doesn't accrue on the interest, but the capital amount of each loan is accruing interest. So yeah, what you said.

No, I think your explanation was perfectly clear and accurate. I just laid out all the numbers for the OP, since s/he apparently isn't inclined to crunch the numbers.

It's amazing to see how borrowing $50K for the MS1 year -- a number that's begun to seem "average", even reasonable -- translates to a $300K debt, isn't it? I wonder if your average pre-med realizes this?

 

[TMP-SMX]

This wouldn't make a huge amount of difference, but if you have two disbursements a year wouldn't your second disbursement only be gaining interest for 3.5 years at graduation?

In terms of 25,000 unsubsidized stafford a year with 12,500 twice a year:

(12 500 * 4 * .068) + (12 500 * 3.5 * .068) + (12 500 * 3 * .068) + (12 500 * 2.5 * .068) + (12 500 * 2 * .068) + (12 500 * 1.5 * .068) + (12 500 * .068) = 14 875

So if I borrow 25,000 each year unsubsidized then I will tack on $14,875 to be capitalized at graduation (unless they fix the residency deferment). So with the unsubsidized and $8500 subsidized a year and capitalized interest I will owe $148,875 at repayment? (100,000+34,000+14,875)

Fortunately with T.H.E. it will be 5.5% interest once I'm in repayment. So that's a plus.

 

[mtrlOATgal]

I was wondering if it would be wiser to take on a line of credit that makes you pay a lower interest rate but you have to make monthly interest payments as compared to a line of credit that has a higher interest rate but with capitalization at the end of your studies....the former is in canadian dollars and latter is in american dollars....

 

[exgatr]

Editing to add that I am stupid today (and yesterday). Interest doesn't accrue on the interest, but the capital amount of each loan is accruing interest. So yeah, what you said.

Interested definitely does accrue on interest, but not until it's capitalized at the end of the quarter.

In layman's terms, if you're not paying the interest on your loans while in school, where does it go? That amount gets added onto your loan balance at the end of the quarter and you have to pay more interest on the new, higher capital balance.

 

[Doctor Bagel]

Interested definitely does accrue on interest, but not until it's capitalized at the end of the quarter.

In layman's terms, if you're not paying the interest on your loans while in school, where does it go? That amount gets added onto your loan balance at the end of the quarter and you have to pay more interest on the new, higher capital balance.

But it's not capitalized at the end of the quarter for federal loans. Interest on federal loans isn't capitalized until you enter repayment, so no, interest actually isn't accruing on your interest. It's a very unique feature of federal student loans.

 

[badasshairday]

How often does capitalization occur on Stafford loans? I understand it occurs once on your unsubsidized portion when you enter repayment. But does it continue to occur monthly whether your do IBR or Forebear?

 

[TMP-SMX]

IBR only capitalizes when you no longer qualify for partial hardship or if you switch repayment plans.

 

[syoung]

Forgive me but what the heck is capitalization, in relation to my future med school loans?

Plus, given you guys have 3 kinds of loans (fed sub, unsub, and gradplus), does that mean 3 diff applications? Or just FAFSA?

Also, is it more "advantageous" to not have more than 10k in your bank account before turning in the FAFSA?

I'm older than 25, do my parents' income need to be reported on fafsa and/or will it be used?

Damn I need to read up on this next month.

 

[MT Headed]

1) Forgive me but what the heck is capitalization, in relation to my future med school loans?

2) Plus, given you guys have 3 kinds of loans (fed sub, unsub, and gradplus), does that mean 3 diff applications? Or just FAFSA?

3) Also, is it more "advantageous" to not have more than 10k in your bank account before turning in the FAFSA?

4) I'm older than 25, do my parents' income need to be reported on fafsa and/or will it be used?

Damn I need to read up on this next month.

1) Capitalization refers to when your interest on a loan can start creating interest of its own. In most loans on the planet capitalization is instantaneous, which is why most people aren't familiar with the term, but there is this weird clause with student loans that as long as you are in school or making financial hardship IBR payments, all your interest goes into a "penalty box" and only the original loans create more interest. Once you start making non-hardship IBR payments (typically occurs when you are done with residency and are now an attending) all that interest in the "penalty box" gets piled onto the original loan and now the whole enchilada starts creating interest payments.

2) There is only one FAFSA, and then usually an additional school-specific form you fill out at your chosen medical school. Also, there are no subsidized stafford loans for medical school anymore.

3) I applied to the FAFSA and maxed out many fields on the form. My expected contribution was the maximum amount, all 9's. I still qualified for a normal stafford for the maximum stafford amount, and then enough gradplus to bring the total loan amount up to the COA of my chosen school. So significant money in the bank will not lower your federal loan amounts below the COA. However, a lousy personal credit rating will lower or eliminate your gradplus amount, and then you would need to seek alternate non-governmental financing for med school.

4) Reporting parental income on the FAFSA is optional, and will not affect your federal loan amounts in any direction. At a professional school level, the federal government assumes you are now independent no matter how young you are. On the school specific form, for school specific loans and school scholarships etc, they usually require parental information, mostly to make sure they aren't giving a scholarship to a seemingly financially needy student who has really loaded parents. Yes this sucks if you can't obtain your parental info or if your parents are loaded but not contributing financially towards your professional education. Deal with it. Unless you have terrible credit you will most likely qualify for the full COA at your school through federal stafford and federal gradplus loans anyway.