yes, this is one thing you should *definitely* try to do if you can. all that added interest will continue to be compounded along with the rest of your actual loan money, so the lower you can keep your total debt, the better. i read some estimate that a student who takes out $200K in loans and doesn't pay off the interest as it accrues will end up paying off about half a million after 10 years--nearly three times the actual amount they took out in loans. i haven't done the math to check how accurate this is, but one thing that has been recommended to me is to pay off the interest.
This first year of medical school will probably be the best year to pay off the interest as it accrues because it is unlikely that loan rates will ever be so low again (around 4.5 percent -- they'll know the exact rate at the end of May).
The interest payment on each $10,000 of loan will be approximately $38 per month based on a rate of 4.5 percent.
Interest compounds annually for Stafford loans so all the interest that accrues after one year, will be added to the principal loan amount. As an example if you borrow $10,000 each year and don't pay the interest as it accumulates (assuming a 5 percent loan rate across the board which is very generous):
Loan Amount $10,000
Loan Amount $10,500 + 10,000
Loan Amount $21,525 + 10,000
Loan Amount $33,101.25 + 10,000
Total Principal when you start residency: $45,256
If you pay the interest as it accrued (a total of $5000 over four years) your princpal savings will be over 10 percent. Your loan principal when you start residency would be the original $40,000 that you borrowed. With higher interest rates the savings would be much greater.
Capitalization is just the fancy term for compounding when it is done over longer than one quarter.
In basic terms there are three types of loans: simple, compounded, and capitalized
For a simple interest loan, you never pay interest on interest owed.
A compounded and capitalized loan, interest is added to the principal amount of the loan. On many loans, the interest is compounded monthly. On the Stafford Loan, interest is compounded annually and hence called capitalization.
Technically, you could save up all the interest on the Stafford Loan and pay it on the day before it is to be capitalized and be in the same boat as if you paid it as it accrued.
•••quote:•••Originally posted by Doctora Foxy:
•So, how do you pay for interest while in med shool? Where does the money come from? Do you pay it from loan money? •••••I plan to work this summer in order to have money for rent before my loans come through. If I have any left, I'm going to save it up and hopefully can pay the interest with it. Hopefully.
Do not pay off interest with borrowed money unless the borrowed money is interest free. It defeats the purpose, as that borrowed money will accrue interest faster than the interest on the original loan will accrue interest. (Does that make any sense?). Perhaps your parents can help you out or use money from your own savings. Pay what you can afford and keep borrowing to a minimum.
If you borrow $10,000 per year and the interest rate is 5 percent you will need:
First year: $41.67/month ($500 total)
Second year: $83.33/month ($1,000 total)
Third year: $125/month ($1,500 total)
Fourth year: $167.67/month ($2,000 total)
and you will have no interest accrued or capitalized at the end of your fourth year. That averages to $104/month for each $10,000 borrowed per year (i.e., if you borrow $30,000 per year you would need $312/month over four years to prevent any interest capitalization). The interest accrual would stay the same at that fourth year rate during residency assuming you don't borrow additional funds and the interest rates does not rise. Realize that the 5 percent I used in this example is a very low rate -- rates will likely be higher in future years.
The maximum rate for Stafford loans in 8.25 percent. And, if you quality for subsidized Staffords, then this discussion is moot as the government will pay the interest as it accrues.
•••quote:•••Originally posted by mpp:
•Do not pay off interest with borrowed money unless the borrowed money is interest free. It defeats the purpose, as that borrowed money will accrue interest faster than the interest on the original loan will accrue interest. (Does that make any sense?). Perhaps your parents can help you out or use money from your own savings. Pay what you can afford and keep borrowing to a minimum.
•••••Actually, that makes a lot of sense and I guess that was a dumb question I had. Maybe I'll save up some money this summer then, I'm sure I can make $500 at least to cover the first year's interest.
mpp- Thanks for all the financial advice! If I may keep picking your brain...what if you use part of a subsidized Stafford to pay the interest on unsubsidized Staffords as you go? The first $8500 I borrowed is subsidized during school - so if I have money left over at the end of the year, would it make sense to use that money to pay the interest on the unsubsidized loans? Or would I be better off just borrowing slightly less in unsubsidized loans to begin with?
Also- is it univerally true that lenders do not capitalize the interest until one full calendar year has passed? So if you do pay the interest, there is absolutely no reason to make monthly or quarterly payments- just pay all the interest for the entire year before the year is up? Or
Hi everyone. I'm graduating this year, so I feel pretty up-to-date on all of my loan information. I just wanted to clarify one point ... the interest which accrues on federal unsubsidized stafford loans is not capitalized until 6 months after graduation from medical school. So some of the calculations listed on this site are wrong ... you will only accrue interest on the principle amount borrowed until your loans go into repayment, at which time the interest is capitalized. If for some reason you do not pay the interest during residency (ie declare forbearance) then the interest is capitalized annually. You have the option of paying off the interest at any time during medical school, including after you graduate, but before the end of the 6 month grace period when the loans go into repayment.
Having now gone through this, I would recommend if you have any money left over at the end of the year, to hold onto it instead of immediately paying off the interest. I was very aggressive about paying off interest with "left-over" money during my preclinical years, but I found in the clinical years, particularly when you need to come up with money for residency interviewing and possible moving expenses, that I really wished I had that money. Money is much harder to get now, because interview expenses and moving costs are not included in the medical school budget, so loan money can't be gotten to help cover these expenses. And it was really expensive! Hope this helps.
krabi is right. I screwed up. The capitlization does not start until you go into repayment which is only after you finish school. Once the capitlization begins, it is annual.
So my advice is in error. It would be better not to make interest payments while in school but to use the money that would be used to make interest payments work for you (i.e., earn some interest in a safe account). Then take the money you have saved and make one lump sum payment just before the interest will be capitlized. The only problem with this technique is that people tend not to be disciplined enough to make payments into an account that will disappear later unless they are forced. So if you are not good with money (i.e., at the end of every month you ask yourself "where did all my money go?") it is probably wise to make interest payments as it accrues.
As far as using subsidized loan money to pay interest on the unsubsidized loans it is an Ok idea if there is nowhere else to get the money. It is sort of like taking out a second mortgage on your house to pay off the first mortgage. You really won't be ahead of the game. However, if you tend not to be too disciplined with money and spend any free money sitting around on non-necessities, then it makes sense to pay off the interest so that you don't accidentally spend the money on a diamond-studded rack for your collection of historical issues of TV Guide magazine.
Another correction - federal Stafford loans are FIXED AT 6.8%...forever. Grad Plus are fixed at 8.5%...forever. It would take an act of congress (literally) to change it. So you can't capitalize on the low interest rates, and you now no longer have a choice of lenders. It comes straight from the Feds. It also has a 1% loan origination fee, which I avoided last year back when I had a choice of lenders. 1% sounds like peanuts, but its over 400 bucks when you borrow 40 grand a year! This gets offset somewhat by an interest refund, I forget what they call it, that basically knocks the origination fee in half BUT if you don't start making payments after the grace period it gets tacked back on. Correct me if I'm wrong about that, but I seem to remember reading that in the letter I got.
And check on the back of your loan statements that you get every semester. It says on just about every piece of paper you get from your loan company when and how the interest is capitalized and compounded. Its all the fine print that gets easily ignored. Keep up with this stuff so it doesn't come back to bite you in residency!
*Edit* what I said still stands but I just noticed that this thread is from 2002. sorry!