Confirmation on Stafford Unsub. Interest

[Cheshyre]

Advertisement - Members don't see this ad

I just wanted to make sure of this since I never had to carry loans through undergrad. I read the "Fantastic 2008 FAFSA" stickied thread, but I have to be sure.

Say I borrow $10K in Unsubsidized Stafford Loans as an M1. This is how I have it calculated through my 4 years in school with an interest rate of 6.8%:

(One year's interest)
10000 * 0.068 = $680

(The interest that would accrue by the time I left school in 4 years)
680 * 4 = $2720

(The new principal I would have upon entering repayment after leaving school)
10000 + 2720 = 12720

Is this correct?

Also, if I deferred payment during a 3 year residency, does interest only accrue on the principal amount (10000 * 0.068 * 3) or is it compounded (12720 * 0.068)? Or, does this depend on the lender's terms?

Thanks in advance!

 

[ChiDO]

It's compounding interest; thus basically, interest is added to the principal and then * by the interest rate to get your new interest. That is subsequently added back into the principal, rinse and repeat forever.

I'm not sure if it's compouned daily, monthly, or yearly, but if it's yearly this is what would happen.

1: $10K + $680
2: $10, 680 * .068 = X
3: $X * .068 = Y
4: $Y * .068 = Z
5: ect,

 

[rbnsafsadgf]

.
Check out the loan calculators at:
http://www.finaid.org/calculators/

 

[rbnsafsadgf]

Also, if I deferred payment during a 3 year residency, does interest only accrue on the principal amount (10000 * 0.068 * 3) or is it compounded (12720 * 0.068)? Or, does this depend on the lender's terms?

You cannot defer during residency anymore (the rules changed a few years ago). You can go into forbearance, do IBR, or regular re-payment, among other things. Read up on these loans. These are very basic things you should be able to answer yourself before you sign any papers.

The ONLY lender for Stafford loans this next year is the Federal Government through the Direct Loan program. They are considered a fairly good lender except for the fixed interest rate aspect.

A Google search will lead you to:
http://www.direct.ed.gov/

 

[Cheshyre]

I guess I worded it kind of unclearly. It was 2am, after all.

Anyway, I just wanted to confirm that when interest is calculated on your loans while you're a full-time student, it's only based on your original loan principal. In other words, there is no interest on interest while you're in school for the Stafford Unsubsidized Loan.

Example:
Year 1: You take out $10000. Interest accrued (am I using this word properly?) at 6.8%: $680
Year 2: You now owe $10680. Interest accrued in your second year: $680.
Year 3: You now owe $11360, and so on.

Is this correct?

 

[rbnsafsadgf]

.

 

[Cheshyre]

No. For UNsubsidized loans, interest is compounding the entire time. That is the very definition of compounding interest.

the basic formula
is principle * (1 + interest rate) ^ #time period

so for 4 year med school + 3 years residency (assuming forbearance, rather than any form of payment):

10000*(1.068) ^ 7 = $15,848

Please read the links from the previous posts.

Will do. Just so you know though, I'm basing my calculation on this thread, which seems to imply that there's no compounding:

http://forums.studentdoctor.net/showthread.php?t=479086

 

[rbnsafsadgf]

Oh wow. you're right.

From my MPN:

ED charges interest on a Direct Unsubsidized Loan during all periods (including in-school, grace, deferment, and forbearance periods), starting on the date of the first disbursement. I agree to pay all interest that
is charged to me. I will be given the opportunity to pay the interest that accrues during grace, in-school, deferment, forbearance, or other periods as provided under the Act. If I do not pay the interest,I understand that ED may capitalize the interest at the end of the grace, deferment, forbearance, or other period.
​

Nice! Thanks for pointing this out. I never noticed this subtle point before!

 

[Cheshyre]

Whew. When you were so adamant about there being capitalization while we were in school... yeah, started to panic a little bit there. Thanks everybody, for your input.

 

[rbnsafsadgf]

So, yeah, I re-did my projected debt spreadsheet and it changes my total debt at end of residency from ~$335k to $305k . Not a trivial difference.

 

[Cheshyre]

So, yeah, I re-did my projected debt spreadsheet and it changes my total debt at end of residency from ~$335k to $305k . Not a trivial difference.

That was fast, haha. How are you doing that? I forgot all of the Excel functions I used to know so all of my calculations are on paper.

 

[rbnsafsadgf]

That was fast, haha. How are you doing that? I forgot all of the Excel functions I used to know so all of my calculations are on paper.

MS1 $ at beginning $ after 7 years
Sub Stafford 8500 =8500
Unsub. Stafford 100000 =10000+(10000*0.068*7)

and then do that for each year (MS1-MS4) decreasing the year by one each time (change the 7 to a 6 and so on). Then sum the third column.

This method assumes that IBR will make it so that sub loans are sub'd during the 3 year residency, but not assuming any actual payment (which their would be).

 

[Cheshyre]

MS1 $ at beginning $ after 7 years
Sub Stafford 8500 =8500
Unsub. Stafford 100000 =10000+(10000*0.068*7)

and then do that for each year (MS1-MS4) decreasing the year by one each time (change the 7 to a 6 and so on). Then sum the third column.

This method assumes that IBR will make it so that sub loans are sub'd during the 3 year residency, but not assuming any actual payment (which their would be).

Okay, that's what I've been doing on paper. Thanks a lot!

 

[rbnsafsadgf]

That P+(P*0.068*yrs) formula might only work for med school years.

I am having a hard time figuring out when you transition from med school to residency whether the interest is capitalized then at the end of MS4 (since you are entering repayment with the IBR), or whether it capitalizes when your are done with residency (if you forbear).

Because, according to my calculations, when the interest is capitalized makes a difference whether IBR or forbearance is cheaper during residency.

The discussion here isn't clear either:
http://forums.studentdoctor.net/showthread.php?t=725145

 

[Cheshyre]

That P+(P*0.068*yrs) formula might only work for med school years.

I am having a hard time figuring out when you transition from med school to residency whether the interest is capitalized then at the end of MS4 (since you are entering repayment with the IBR), or whether it capitalizes when your are done with residency (if you forbear).

Because, according to my calculations, when the interest is capitalized makes a difference whether IBR or forbearance is cheaper during residency.

The discussion here isn't clear either:
http://forums.studentdoctor.net/showthread.php?t=725145

I would call your Financial Aid office. I did that yesterday and they were exceedingly patient/helpful.

Also, if you'd like to increase the accuracy of your loan projection even more, work in a 5% tuition increase into each year. It's an annoying little detail.

 

[TMP-SMX]

Capitalization occurs at the end of your grace period whether you start IBR or forbearance. Then if you are in IBR you do not capitalize again until the end of IBR (up to three years). If you forbear, you capitalize every year (because you must reapply every year).

I'm relatively sure about capitalization prior to IBR starting but not 100% sure.