Can I give back loan money I don't spend during the year?

[skijumpbump]

I am at the point in time now were I am deciding how much of my financial aid package to accept. I did not receive any form of scholarships but I know that Stafford subsidized and unsubsidized will be enough to cover my cost of attendance. These will probably be more money then I need.

My question is can I return some of the money I don't spend at the end of the year? I don't want to have extra money from loans as I don't know of any saving accounts which pay 6.8% interest, so if I accept more then I need I will be loosing money.

I only anticipate this being a problem during my first year, until I get a feel for the amount it will cost me to live on. So does anyone know if I can just give the money back to the lender without paying interest before a certain time period?

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[TMP-SMX]

End of year no. Within the first few weeks yes. You can also request more if you need it. Just take out plenty so you don't have to worry about running out. You'll understand pretty quickly that over the next four years you are losing a lot of money. Don't worry about the few hundred dollars of extra interest. If you really do end up with a lot extra at the end of the year just take out a little less the next year keeping in mind that M2 is usually a longer year and that even during the summers you need some money to live on.

 

[GeraldMonroe]

Right. Another thing to keep in mind : you just might end up benefiting from the 10 or 25 year loan forgiveness programs being offered via Income Based Repayment. In that case, the total amount of money borrowed will matter much less (actually, you benefit from borrowing more, because it would increase the amount of money the government forgives)

Now, don't go nuts : the government could easily renege on the program. Be fiscally responsible, don't borrow a ton more money than you need, go to the cheaper school, etc. Just don't sweat a mere 10k or so.

 

[dragonfly99]

You can only give back the money within a few weeks of getting it. Otherwise you are stuck with it and the resulting 6.8% interest. I recommend not taking out more $ than you need, though the others made a good point above that you may end up needing a little more money than you think. Still, I found that I always could borrow less than the supposed cost of attendance...it will depend on your school. I disagree with the philosophy of not worry about the few extra hundred dollars of interest...it becomes thousands, potentially. At the same time, you don't want to be too draconian about all this...can't eat ramen noodles every day, etc.

 

[dragonfly99]

The money seems like play money when you are borrowing it, because most don't have any experience with being 100,000 or 200,000 or 250,000 in debt. It becomes real when you have to repay it.

 

[TMP-SMX]

I'm not recommending they take out the full cost of attendance if they don't need it. What I'm comparing it to is running out of money (I'm talking about a few thousand dollars not $20,000 extra). If they do take out too much first year then taking out less the next year will make it right.

 

[MD13]

Hold on, why can't someone simply return the money under the pretense of repaying part of the loan? I don't think I'm following why everyone is saying 'no' to the OPs question--am I missing something?

So, for example, if you take out $40,000 in Year one and realize in March that you won't need all of it to hold you over until your next disbursement in August (say you will have 5K left over)..why can't you just repay 5K of the loan you took out? Or can you not repay loans during deferment or something?

Thanks

 

[GeraldMonroe]

Hold on, why can't someone simply return the money under the pretense of repaying part of the loan? I don't think I'm following why everyone is saying 'no' to the OPs question--am I missing something?

Because you don't get back the fees for that loan. Much better idea to simply decline to take out as much money for the following year's loans.

 

[MD13]

Because you don't get back the fees for that loan. Much better idea to simply decline to take out as much money for the following year's loans.

So you're saying that the fees for that part of the loan are greater than the 6.8% interest you would accrue for having that extra loan money for those 6 months? I'm a little confused..are you talking about the origination fees? What other fees would be there?

I just want to be clear on this: So going back to my example above..you want to pay back 5K in March to prevent accruing 6.8% on 5K for 6 months (March - August) = $340.

Now assuming that you are talking about origination fees, are you saying that the origination fee for taking out an additional 5K in the following disbursement would equal more than $340? That can't be.. So what other fees are involved?

The choice here seems to be:
1. In March, pay 5K of the 'extra money' back to the bank and save out on $340 interest, and then take out whatever you need next yr
2. In March, keep the 5K in the bank and then next year take out 5K less.

So why would option 2 be better?

Thanks.

 

[GeraldMonroe]

So you're saying that the fees for that part of the loan are greater than the 6.8% interest you would accrue for having that extra loan money for those 6 months? I'm a little confused..are you talking about the origination fees? What other fees would be there?

I just want to be clear on this: So going back to my example above..you want to pay back 5K in March to prevent accruing 6.8% on 5K for 6 months (March - August) = $340.

Now assuming that you are talking about origination fees, are you saying that the origination fee for taking out an additional 5K in the following disbursement would equal more than $340? That can't be.. So what other fees are involved?

The choice here seems to be:
1. In March, pay 5K of the 'extra money' back to the bank and save out on $340 interest, and then take out whatever you need next yr
2. In March, keep the 5K in the bank and then next year take out 5K less.

So why would option 2 be better?

Thanks.

Easy.

Choice 1 : leave the 5k in a high yield savings account (5.25% at Redneck Bank). Thus, you're actually paying 1.55% interest per year to do this. (6.8%-5.25%)

Choice 2 : give the 5k back. You forfeit the 2% origination and guarantee fees. The next year, you end up taking the full loan amount, and paying the 2% fee AGAIN.

So, it doesn't make sense to give the money back instead of leaving it in the bank unless you're going to leave it in the bank over a year.

A second consideration is that you're going to need about 5k-10k in 4th year to pay for moving expenses, residency application fees, and residency interview travel costs. Many people take a private loan to cover this (10%+ interest) when they could have left it on their student loans. Personally, I want to take a vacation 4th year as well...going to be one of my last vacations for a long time.

A third consideration is that student loan forgiveness might make it to where it makes economic sense to borrow more.

A fourth consideration : you only live once, as you'll quickly figure out when start seeing how quickly people fall apart and die after enough time passes. Extra money can make a large number of things possible. Maybe you want to get married. Maybe you want to wear slightly less crummy clothing. Perhaps your computer is dying, and you want a newer, faster one. Ditto for cars. 5-10k is chump change, and you might as well hold on to it for getting past life's little tollbooths.

 

[potato head]

okay. i'm learning about this process just as much as MD13 is.

is it true that i can avoid the 6.8% interest accruing if i return the money back to the bank by, let's say... the spring of my first year?

replying to your response:

1) i probably will not find a high yield saving account (especially a 5.25% one) during these times & with my resources. so this option will not be considered by me.

2) paying 2% origination fees twice on a sum of money seems better than 6.8% on the same amount, i suppose. or maybe i'm missing something.

2.1) i have a high CoA, but low actual expenses. i will not be needing private loans at my school. i'll have room for an extra 5-10K, if needed, for residency applications, so this point probably doesn't apply to me.

3) i'm not considering loan forgiveness either. in fact, i'm hoping to pay off my loans 10 years after graduation.

so basically, i'll have a reasonable debt by graduation, but anything to lower my interest amount would be great. if i realize i've taken out a few thousand more than i really need by the second half of the year, would i forego accumulating interest on it if i return it to the bank for that half year?

thanks for any responses.

Easy.

Choice 1 : leave the 5k in a high yield savings account (5.25% at Redneck Bank). Thus, you're actually paying 1.55% interest per year to do this. (6.8%-5.25%)

Choice 2 : give the 5k back. You forfeit the 2% origination and guarantee fees. The next year, you end up taking the full loan amount, and paying the 2% fee AGAIN.

So, it doesn't make sense to give the money back instead of leaving it in the bank unless you're going to leave it in the bank over a year.

A second consideration is that you're going to need about 5k-10k in 4th year to pay for moving expenses, residency application fees, and residency interview travel costs. Many people take a private loan to cover this (10%+ interest) when they could have left it on their student loans. Personally, I want to take a vacation 4th year as well...going to be one of my last vacations for a long time.

A third consideration is that student loan forgiveness might make it to where it makes economic sense to borrow more.

 

[TMP-SMX]

okay. i'm learning about this process just as much as MD13 is.

is it true that i can avoid the 6.8% interest accruing if i return the money back to the bank by, let's say... the spring of my first year?

No. Not true. Staffords accrue interest even during in-school deferment daily. (Though it doesn't capitalize so it doesn't make any difference). Obviously they don't capitalize (interest starts building on interest) until you enter repayment after your grace period.

1) You are probably right that you won't find a savings account at 5.25%, however even a few percent is better than 0%.

2) You don't really pay it, because the origination fee is removed directly from your principal amount they give you.

2.1) You wouldn't need private loans anyway, because I would recommend grad plus over private loans since they have no limit up to the cost of attendance. Keep in mind that longer years will require you to take out more loans due to more tuition and a higher cost of living.

3) Good plan and reasonable goal with lower loans

Yes, there would be no interest accrual on the second disbursement if you return it within the first few weeks. The best thing you can do to reduce interest is not take money you don't need in the first place. Remember to calculate a budget based on summer expenses while you are not in school also. You might take a trip during the summer or something you haven't thought about. It's good to have a little bit extra than not enough in case of something unexpected happening.

 

[nlax30]

Discover currently has zero fees.

 

[TMP-SMX]

Discover currently has zero fees.

This is true. Though many schools are now Direct only. Direct loans also have a 1.5% origination fee as of July 1, 2009, but there is a rebate that reduces this amount to 0.5%. So it is pretty negligible and since Discover is the only lender offering decent terms, this is why most schools are moving to direct.

 

[ScottE]

Rule #1 Banks loan you money when you DO NOT NEED it
Rule #2 When you NEED a loan, see Rule #1

Money was relatively easy to obtain only a mere year ago. I'm a graduating
4th year med student and I made application for a private loan in January through my school, which required the school's certification (blessing) and me passing a credit qualification. The money was for the extra expenses associated with boards, review materials, travel on rotations (at times running 2 households, essentially) and interviews. For the most part, this was money already spent and I anticipated much more expenses rolling into my final 5 months, plus expenses over May/June as a new grad and preparing to move for residency.

The financial aid director suggested Sallie Mae which was one of two lenders still offering private loans (down from 12 last year). I passed the credit check and the school certified the loan. Financial Aid Director's email to me "It will be in your account in 3-4 days!". Famous last words...80 days later and no loan. Nothing through the other lender. Director has NEVER seen this in her 15+ years in the position.

The bottom line is this: Take the money that you can IF you can be responsible with it. Pay the interest payments on your loans every month you can and sit on the rest. Even if you have the cash sitting in a savings account, CD or money market acct. the 3-5% hit you might take for borrowing the money will pale in comparison to the cost of you not being able to obtain the cash when you NEED it.

 

[dragonfly99]

wow, sobering...
credit is really tight right now.
I managed to get a loan to buy a condo, but it was hard...and I have basically perfect credit, and have been a resident x 3 years (so steady job since graduating from med school).

 

[Miami_med]

I have been approved for and am closing on a house on Friday. I am doing this as a standard FHA loan. Let me explain why this is important:

I qualified for this home loan because ALL of my other debt is federal student aid, and my financial aid office was able to write a letter that stated that this was deferrable for atleast a year. I was able to not borrow any other money because I intentionally overborrowed in my first and second years. I was hit with some interesting and sobering expenses of the unexpected variety in my third year, but I overborrowed enough to still have money left for interviews in my fourth year (ended up costing close to $8k in a moderately competitive specialty. Not pretty).

You have a limit as to how much you can borrow every year from Federal Loan Programs. Now due to the presence of the Grad Plus loan, this amount is equal to your schools cost of attendance rather than a fixed number as it was before. This money doesn't follow any of the rules of normal money (whether that is good or bad thing is another topic). These loans are absolutely deferable, with either a formal deferment in some cases or a forebearance in others, during residency. Their rates are artificial and now fixed. You cannot discharge them in bankruptcy, but there are about a million programs that make you able to avoid paying them into near perpetuity until you get a long way from poverty. The new IBR essentially promises that you will never be paying more than 15% of income above 150% of poverty regardless of what you owe. I am extraordinarily conservative with debt, and I have never carried any consumer debt. However, student loans offer an incredible amount of flexibility, and you will have to weigh the cost and benefit of payng the extra interest versus the promised liquidity. For me, it turned out to absolutely be the right decision to borrow too much up front.

 

[The JockDoc]

You have a limit as to how much you can borrow every year from Federal Loan Programs. Now due to the presence of the Grad Plus loan, this amount is equal to your schools cost of attendance rather than a fixed number as it was before. This money doesn't follow any of the rules of normal money (whether that is good or bad thing is another topic). These loans are absolutely deferable, with either a formal deferment in some cases or a forebearance in others, during residency. Their rates are artificial and now fixed. You cannot discharge them in bankruptcy, but there are about a million programs that make you able to avoid paying them into near perpetuity until you get a long way from poverty. The new IBR essentially promises that you will never be paying more than 15% of income above 150% of poverty regardless of what you owe. I am extraordinarily conservative with debt, and I have never carried any consumer debt. However, student loans offer an incredible amount of flexibility, and you will have to weigh the cost and benefit of payng the extra interest versus the promised liquidity. For me, it turned out to absolutely be the right decision to borrow too much up front.

I'm curious about what you're saying here. I get the gist of it, but what programs in particular are you talking about, and what do you mean by flexibility offered by loans?

 

[ChiDO]

This is my take on this situation. If you have 0% fees (like all my loans have), if I ended up with extra (read a few thousand) dollars, I would definitely start paying back the loan with that money. I'd rather not accrue the 6.8% on that money if I'm not using it.

Now, if you cannot get the 0% fee loans, then you'd have to calculate which is cheaper. Taking out 20k next year with the fee (returning the 5k extra) or keeping the 5k at 6.8% then only taking 15k next year with the fee.

In this situation, assuming 1.5% fee for the new loan, you are better off depending on how early you return the extra 5k with taking 20k @ 1.5% then 15k @ 1.5% + 5k @ 6.8% (for an extra 4 months). (I think I did the math right)...ok back to neuro study...ugg

 

[Miami_med]

I'm curious about what you're saying here. I get the gist of it, but what programs in particular are you talking about, and what do you mean by flexibility offered by loans?

Virtually all other student loans (and in fact many standard loans of all types) have variable interest rates and fixed payment schedules. They may come with some sort of deferment, but this is usually a fixed number of years. Federal loans avoid all of these problems. If you're unemployed, you are automatically deferred with no credit consequences. If you don't make enough money, you are automatically granted deferments. Between Deferment/Forebearance, if you want to pursue a residency/fellowship/super-subspecialty fellowship, etc... you will essentially be able to put off the loans into perpetuity. When you finally decide to pay them back, it will be with one of about 10 different ways, with you choosing the way that works for you. You can pay them off in 10/15/20/30 years at a fixed payment. You can make graduated payments. You can make payments sensitive to your income. You can make payments now that don't make you pay anything until you are making >150% of the poverty mark, and then limit your payment to 15% above that number. On top of all of this, various forms of forgiveness exist. You could owe $400k in loans, take a job as an inner city family doc at a public clinic for $90k/year, and only pay a fraction of your actual payment under IBR, and after 7 years at your job (plus 3 years of residency) you will likely be forgiven your balance (prepare for a bad tax year). If you decide you want to have 10 kids, your payment will actually drop with your increasing family size. None of this type of stuff is possible with any other private loan type, because these options are political by nature and make no economic sense to a lender.

 

[GeraldMonroe]

Thumbs up to Miami Meds advice.

Consensus advice : If you didn't start medical school with more than $5000 in the bank, consider taking out the max for all 4 years of medical school, and not giving the excess back. Put the excess into a high yield savings account. Currently, "redneck bank" (an actual bank, google for it) offers a 5.25% promotion.

1. If something unexpected comes up, you'll have several grand in cash to cover the bill with.
2. In fourth year, residency interviews and relocating cost a lot of money. If you have it in an account, you can avoid borrowing it - notice the post from someone who couldn't borrow it, despite passing the credit check. And as you can see, Miami_Med benefited greatly from keeping all his debt as student loan debt, rather than also carrying private loans as well.

It's not really that much money, and you'll find an appropriate way to spend it sooner or later. Invest it in board review books, or personal training, or a better laptop, or something else that helps you. Even a better suit for your residency interview might be an appropriate investment. And what if your car breaks and needs $3k in repairs? Or if you get injured and need major surgery? Happens all the time.

 

[Miami_med]

Thumbs up to Miami Meds advice.

Consensus advice : If you didn't start medical school with more than $5000 in the bank, consider taking out the max for all 4 years of medical school, and not giving the excess back. Put the excess into a high yield savings account. Currently, "redneck bank" (an actual bank, google for it) offers a 5.25% promotion.

1. If something unexpected comes up, you'll have several grand in cash to cover the bill with.
2. In fourth year, residency interviews and relocating cost a lot of money. If you have it in an account, you can avoid borrowing it - notice the post from someone who couldn't borrow it, despite passing the credit check. And as you can see, Miami_Med benefited greatly from keeping all his debt as student loan debt, rather than also carrying private loans as well.

It's not really that much money, and you'll find an appropriate way to spend it sooner or later. Invest it in board review books, or personal training, or a better laptop, or something else that helps you. Even a better suit for your residency interview might be an appropriate investment. And what if your car breaks and needs $3k in repairs? Or if you get injured and need major surgery? Happens all the time.

I'm not sure that I'd be taking out maximum loans if I really didn't need money or I had a lot of help and backup, but you're correct that very conservative investments can stop some of the bleeding from the interest, and as I said, you will never see repayment terms like these again. Choose wisely and base that decision on your personal needs. Repayment of $200k vs. $180k is probably worth that type of flexibility, but don't borrow $200k to sit in the bank if daddy is going to pay for med school. You have to personalize the choice. In the past, when interest rates could be consolidated to like 3%, I would have said to absolutely borrow the max as a no brainer, with government bonds paying positive yields. This is not the case now, so these loans are often worth it, but not without risk. Create a realistic number for financial flexibility.