GRAD PLUS vs other PRIVATE loans

[gummybearpen]

Hey everyone,
Like many health profession students, I am completely lost when it comes to picking out a loan. I am not sure what loan to pick between grad plus or other private loans.

The interest rate on grad plus is very high and the private ones (such as citibank) have much lower interest rates even though they are variable. Even if they are variable, do interest rates really fluctuate THAT much? and if so, most don't go past 8.5% right? I have good credit so I'm thinking about taking out a private but many people are recommending grad plus instead. I am wondering if they are mainly recommending it because they are afraid interest rates will go up but how much higher can they really go?

What are your pros and cons of each type of loan? Would would you choose and why? If you choose private, which private loan in your opinion is best? Also, is it true that paying off your interest with loans is better than returning it back to the bank? (I've heard this from several classmates) I have a lot of questions but I would really really appreciate any type of feedback!

Thanks!!!

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[TMP-SMX]

Grad Plus is a safer loan. The repayment terms and interest rate are safer in terms of what happens if you are disabled or what happens if you die during repayment. Private loans are less secure and interest fluctuates. Also, the repayment incentives don't exist much anymore. Interest rates have been pretty low for the past 10 years, but who knows what will happen in the future. In the 80s, rates were pretty sky high.

I'm not following what you are saying in the last paragraph. Are you saying that if you take out too much money then you should pay off the interest on that loan during school rather than return it within the window of time when you can return part of your loans? Sounds like a bad idea since you paid fees on that money when you took it out and you'll never break even. I recommend you don't take that much more out than you will need. The only time I would recommend making payments during school is if your spouse or yourself have a taxable income so that you could take the student loan interest deduction.

 

[gummybearpen]

Thanks! some classmates told me that using loan money to pay off interest is better than returning it, since interest accrues on previous interest...

when you say they were high, how high?

i guess i'll stick with grad plus then...

 

[Siggy]

Thanks! some classmates told me that using loan money to pay off interest is better than returning it, since interest accrues on previous interest...

when you say they were high, how high?

i guess i'll stick with grad plus then...

Not 100% true. The government loans (Stafford and GradPlus) basically collect interest as a 'separate loan' (my term) at no interest until you stop going to school (graduate or withdraw). At that time the 'interest loan' (my term) is thrown in on top of your regular loan in a process called capitalization (official term). Only until you capitalize the interest will you start to pay interest on the interest.

Now with loan returns. Let's say you take out your entire loan and at the end of the first semester you have $5000 extra left over (you took out too much, you worked, you won the lotto, etc. I do not suggest working during medical school), you can return that $5000 and it's like you never took it out. The interest gained on it is wiped out and origination fee for that $5000 is returned.

 

[gummybearpen]

Not 100% true. The government loans (Stafford and GradPlus) basically collect interest as a 'separate loan' (my term) at no interest until you stop going to school (graduate or withdraw). At that time the 'interest loan' (my term) is thrown in on top of your regular loan in a process called capitalization (official term). Only until you capitalize the interest will you start to pay interest on the interest.

Now with loan returns. Let's say you take out your entire loan and at the end of the first semester you have $5000 extra left over (you took out too much, you worked, you won the lotto, etc. I do not suggest working during medical school), you can return that $5000 and it's like you never took it out. The interest gained on it is wiped out and origination fee for that $5000 is returned.

the grad plus accrues interest on top of previous interest daily, right? so people are saying if you use loan money to pay off the interest, then you won't have to accrue interest on top of previous interest everyday.

 

[Siggy]

That's not how it works. Instead of captializing (adding the interest to the loan principal) every month, the interest is capitalized once at the begining of repayment.

Is interest charged during a deferment or forbearance?


Yes. Interest is charged on a Direct PLUS Loan beginning on the date of the
first loan disbursement, and it continues to be charged during periods of
deferment or forbearance. You may either pay the interest as it accrues (the
Direct Loan Servicing Center will send you a quarterly interest statement), or
you may allow the interest to be capitalized (added to your loan principal
balance) at the end of the deferment or forbearance. Capitalization increases the total loan amount that you must repay.

-GRADPlus FAQ. http://studentaid.ed.gov/students/attachments/funding/PlusLoansQA.pdf

Until the interest is capitalized at the end of the deferment, it isn't in the principal and interest won't be charged on it.