help the financial idiot as he tries to understand stafford loans and their interest

[Rendar5]

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ok, let me know if I have this straight so far, and then help me answer my question at the end:

1. Stafford loans are a good thing.
2. I can take out $8500 in subsidized (no interest during school only?) and $10,000 in unsubsidized (interest) loans each year for my 4 years in school.
3. I'm filling out the forms for Stafford that Einstein (where I'll probably go to school unless I get off the waitlist at my other choice) sent me to fill out, then sending it back to them. The two forms I'm dealing with are Federal Stafford Loan Master Promissory Note and Federal Stafford Loan School Certification. If I go to a different school after sending these forms back into Einstein, the former will still be filed and I will have to refile the latter form, right?
4. During school, the unsubsidized laon will gain something called capital interest. Basically, it means that in repaying the loan after school, it will act as if I really took out $40,000 total in unsubisidized stafford loans + capitalized interest on those 4 $10,000 loans. So I'd be repaying the capital interest, the original loan, and the regular monthly interest that loans normally accrue

Now, if I have that all right, there are 4 questions I have.
The lender name and code were already filled out as Citibank (NYS). Do I have any real reason to try to change it?
What is the current monthly interest rate?
How do I calculate my capitalized interest?
There's a place to mark off if you want to pay unsubsidized interest while in school. My parents said something about being will to help pay off my interest for while I was still in school. If I check this off, I don't have to worry about capitalized interest, right? how much money would be saved by doing this if my parents paid off the monthly interest and I paid them back at a later date?

 

[mpp]

Here are some comments

2. No, you can actually take out $38,500 in Stafford loans total. Up to $8,500 can be subsidized (but you are not guaranteed subsidized funds...these are need-based). The school will tell you what you will be getting and you can accept or refuse whatever they offer.

3. You might have to fill out another Promissory Note...not sure if that tranfers. I doubt it does since it lists the school directly on it. What does not have to be refiled is the FAFSA.

4. Intrest accrues as in most other loans, month to month. However, the nice thing about the Stafford unsubsidized loan is that while you are in school, the interest is not capitalized. That is to say, they do not add the interest that accrues each month to the principal balance (like they do on a credit card). You do not pay any interest on accrued interest until you leave school and your loan enters into repayment. Then all the interest that has accrued for the 4+ years that you are in school gets stuck on to the principal. At that point you will be paying interest on that accrued interest. If your parents are willing to pay the interest, the smarter thing would be to take that money and put it into a savings account or money market that can build some interest. Then the day before your loans go into repayment (and when all that interest has accrued will be added to the principal amount) pay off the interest from that savings account. That is to say there will be no difference in an interest pay-off amount if you pay it monthly during school, or one big payment at the end of school since this interest is not capitalized (aka compounded).

You can choose any lender you wish. See if you like the terms of that lender. My advise is to choose a lender that charges no upfront fees (usually called a guarantee and/or origination fee). These upfront fees will be added to the principal loan amount and you will be charged interest on them. They'll usually give you some excuse that "but we will give you all those fees back after XX number of on-time payments" which is really bullcrap since most people consolidate their loans long before the XX number of on-time payments.

The current annual interest rate for unsubsidized Stafford loans while in school is 2.82% (which means the monthly interest is 2.82/12 or 0.235%...$10,000 borrowed will accrue $23.50 each month). That rate will change beginnng July 1 (the new rate will be announced in early June, likely to be higher than 2.82). Once you are in repayment, they add 0.6% to the rate.

 

[LaurieB]

This is really helpful mpp. Please confirm that I understand this correctly.

If I borrowed $10,000 in unsubsidized aid over four years with four different interest rates, my capitalization would look like so:

Principal Int. Rt. Int. Amt.
Year 1: $10,000 @ 2.82% = $282
Year 2: $20,000 @ 2.92% = $584
Year 3: $30,000 @ 3.12% = $936
Year 4: $40,000 @ 4.85% = $1940

Total Repayment After 4 years = $40,000 + $282 + $584 + $936 + $1940
= $43,390

Total Repayment After 5 years* = $43,390 @ (4.85+0.6%) = $43,390 + $2364
= $45754

*Assumes no payments made during internship year

 

[mpp]

Looks correct to me...and if you made no payments (i.e. you loan is in deferal) then after Year 6 (at 4.85%) the loan balance would be: $47,973. (good approximation of interest rates by the way...I hope we are as lucky as your prediction but something tells me not...I could see interest between 7-8% in 2 years or less...we are headed into some tremendous inflation I'll bet.)

So to go back the original poster's idea of parents paying of the interest...in those first two years of residency your interest on interest is $371....an amount you could avoid paying by making a lump sum interest payment before residency starts.

 

[LaurieB]

Looks correct to me...and if you made no payments (i.e. you loan is in deferal) then after Year 6 (at 4.85%) the loan balance would be: $47,973. (good approximation of interest rates by the way...I hope we are as lucky as your prediction but something tells me not...I could see interest between 7-8% in 2 years or less...we are headed into some tremendous inflation I'll bet.)

So to go back the original poster's idea of parents paying of the interest...in those first two years of residency your interest on interest is $371....an amount you could avoid paying by making a lump sum interest payment before residency starts.

Thanks! I'm definitely a bit hopeful on the rates, but I think you're probably right about the increases. I just hope rates go down in time for me to consolidate at a good rate after I graduate.

 

[bry2781]

I had a quick question: I understand the annual interest rate is 2.82% right now, so that if you look at monthly payments, interest would be (2.82/12)%. However, once it enters the repayment period the interest starts becoming compounded and added to the principle. How is this interest compounded? Monthly? Daily? Also, if loans are disbursed at different times (i.e. begining and middle of the year) and you are getting both the unsubsidized and subsidized loans (30k and 8.5k) are you in control of which is given out first? It seems to me you would want to take the whole subsidized loan amount out first and wait until january to get the remaining amount of the 30k that you need, so that interest isnt running as long on that money.

 

[ForensicPath]

That sample calculation by LaurieB was definitely helpful.

My question is where does consolidation come into play and can/should you consolidate while in school?

I definitely should have taken some economics courses in school, it's like they are speaking a foreign language.

 

[LaurieB]

That sample calculation by LaurieB was definitely helpful.

My question is where does consolidation come into play and can/should you consolidate while in school?

I definitely should have taken some economics courses in school, it's like they are speaking a foreign language.

From what I understand, you consolidate your loans after graduation. From what I've heard, you can get an overall lower rate and achieve less complexity by consolidation. Also, I believe that you are only allowed to consolidate once. I think this is why people wait until after graduation.