How do interest on loans work?

[Springs01]

I'm trying to calculate about how much debt I'm going to be in after 4 years of Dental school.
Without the interest, I'll be roughly 320,000 in debt. How do I figure out how much it will be with interest?


Is this how it works?:
D1- I take out 80K in loans, interest starts accruing monthly
D2 - take out another 80K in loans, interest starts accruing newly on this loan + interest is continuing to accrue on my loans from from D1? Or do the 2 loan merge into one and interest accrues on the total amount?

Also, when does interest become capitalized?
And about how much total interest do you think I'll need to pay after D4?

I've never taken out a loan before, so sorry if i sound very ignorant.

Also, if you'd like to share your own story/experience with dental school debt, please feel free to do so! I'd love to read it.


I appreciate the help!

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[chill45]

Whether the two loans merge into one after a year wouldn't really matter that much. You are still paying a certain percentage of interest on an original amount. But yes interest does start accruing immediately and by the end of your fourth year expect that 320 to turn into 380-400. Then don't forget the interest while you are paying it off, so after 15 years that'll turn into 600+

I don't think this loan could ever be capitalized unless you were able to refinance it (to get a lower percentage rate) and put up some actual capital against it (like a house or business).

 

[Glimmer1991]

Whether the two loans merge into one after a year wouldn't really matter that much. You are still paying a certain percentage of interest on an original amount. But yes interest does start accruing immediately and by the end of your fourth year expect that 320 to turn into 380-400. Then don't forget the interest while you are paying it off, so after 15 years that'll turn into 600+

I don't think this loan could ever be capitalized unless you were able to refinance it (to get a lower percentage rate) and put up some actual capital against it (like a house or business).

The interest capitalizes once you enter repayment... Your grace period is 6 months after graduation.

 

[ChrisM07]

From my asking my particular school, each year you will need to take out a new loan and each year this will be at a different interest rate (I only asked about Federal loans so it might be different if it's private?). Could be higher, could be lower than than the last year's loan. @Glimmer1991 is right, in fact, correct me if I am wrong but I don't think they allow you to make payments until 6 months after.

 

[sjv]

From my asking my particular school, each year you will need to take out a new loan and each year this will be at a different interest rate (I only asked about Federal loans so it might be different if it's private?). Could be higher, could be lower than than the last year's loan. @Glimmer1991 is right, in fact, correct me if I am wrong but I don't think they allow you to make payments until 6 months after.

They will likely be going up since the economy is "recovering" which raises the treasury bill price which in turn raises interest rates.

Also, you can make payments anytime (log on to your loan servicer's website) and interest still accrues during the "grace period", they just give you 6 months where no payment is required.

 

[Glimmer1991]

Yep! You can make payments while you're in school. By all means, do it if you can! Even if you can kill all of the interest before it capitalizes, that is a good thing.

And sjv is right... rates are only predicted to go up. *sigh*

As of now, there are opportunities to consolidate your federal loans at a lower interest rate with a private bank after you graduate. This is good for some people, but not good for others... If you consolidate with a private lender, I don't think you qualify for IBR and other repayment plans of that sort. However, if you were planning to go with the more traditional "just pay the dang thing off" route, the consolidation at a lower rate can be a good thing. Here is one such program: http://www.drbank.com/student_loan_information.html

 

[sjv]

Yeah, you would lose the repayment options associated with federal student loans.

However, with rising interest rates, consolidation with private lenders may become more widespread again as it was almost a decade ago.

 

[mmasurf]

why dont you save yourself the headache and do what smart people are doing, research IBR and apply for it

https://studentaid.ed.gov/sites/default/files/income-based-repayment-q-and-a.pdf

 

[Bereno]

Yep! You can make payments while you're in school. By all means, do it if you can! Even if you can kill all of the interest before it capitalizes, that is a good thing.

And sjv is right... rates are only predicted to go up. *sigh*

This might sound counter-intuitive to most, but I would disagree with the bolded statement. The reason I say this is that if you have the funds to pay interest while in dental school, then you are borrowing too much in the first place. The numbers play out better if you borrow less and let the interest accrue. Anyway, just a little tidbit I wanted to add lol Oh, and yes, interest rates are expected to go up :/

why dont you save yourself the headache and do what smart people are doing, research IBR and apply for it
https://studentaid.ed.gov/sites/default/files/income-based-repayment-q-and-a.pdf

I'm not sure I would say that is what smart people do... it has a very select purpose, but is not ideal for everyone.

 

[Glimmer1991]

This might sound counter-intuitive to most, but I would disagree with the bolded statement. The reason I say this is that if you have the funds to pay interest while in dental school, then you are borrowing too much in the first place. The numbers play out better if you borrow less and let the interest accrue. Anyway, just a little tidbit I wanted to add lol Oh, and yes, interest rates are expected to go up :/

Very true!

However, if you or a spouse got a job early enough, couldn't you start paying the interest right after you graduate (of even before depending on when your spouse starts working) and kill it before it capitalizes at the end of the 6 month grace period? That's what I hope to do... Or does it capitalize the day you graduate?

 

[Bereno]

Very true!

However, if you or a spouse got a job early enough, couldn't you start paying the interest right after you graduate (of even before depending on when your spouse starts working) and kill it before it capitalizes at the end of the 6 month grace period? That's what I hope to do... Or does it capitalize the day you graduate?

You know, I have never actually found out when the interest is capitalized. I remember looking once, but did not find it lol. If, lets say, it capitalizes at 6 months (though I suspect it does not) then it would be an interesting scenario... Not sure if I would try and hit the interest before it capitalizes or if I would try and use the funds to put into working capital for my practice. That said, I suspect it capitalizes on the day of graduation, since the 6 months are optional. If you ever find out, feel free to let me know!

 

[sjv]

You know, I have never actually found out when the interest is capitalized. I remember looking once, but did not find it lol. If, lets say, it capitalizes at 6 months (though I suspect it does not) then it would be an interesting scenario... Not sure if I would try and hit the interest before it capitalizes or if I would try and use the funds to put into working capital for my practice. That said, I suspect it capitalizes on the day of graduation, since the 6 months are optional. If you ever find out, feel free to let me know!

Interest capitalizes when the grace period ends so after 6 months (also at the end of deferment or forbearance period).

 

[Glimmer1991]

Interest capitalizes when the grace period ends so after 6 months (also at the end of deferment or forbearance period).

From what I've read, I believe this is true.

@Bereno:

http://www.direct.ed.gov/dlq-a.html
"Q5. How does your servicer capitalize interest?
A5. Direct Loan Servicing capitalizes all unpaid interest:

• Upon entering repayment
• Upon expiration of a deferment period
• Upon expiration of a forbearance period
• Annually for any borrowers repaying under the Income Contingent Repayment (ICR) plan who have payments that do not cover monthly interest accrual."

http://www.direct.ed.gov/inschool.html
"You may choose to pay interest on your Direct Unsubsidized or Direct PLUS Loans while you are in school. If you choose not to pay the interest while you're in school, it will be added to the unpaid principal amount of your loan. This is called capitalization, and it can substantially increase the amount you repay, especially if you are receiving multiple loans for a multi-year program. Capitalization increases the unpaid principal balance of your loan, and you will be charged interest on the increased principal amount. It will save you money in the long run if you pay the interest as it accrues on your loan while you're in school or during the grace period. This is also true if you pay any interest that accrues during periods of deferment or forbearance after you leave school."

 

[Bereno]

Cool, thanks for the info. However, I still disagree that it is a good idea to pay the interest while you are taking out the loans lol. Unfortunately, it looks like you cannot pay on interest before it capitalizes though... (capitalization starts once you enter repayment).

 

[Kef318]

What if a parent/relative wanted to begin to make some payments on behalf of the student? Can they do that? Should they begin paying the interest?

 

[sjv]

What if a parent/relative wanted to begin to make some payments on behalf of the student? Can they do that? Should they begin paying the interest?

Yeah, of course they can, you just need the login for the loan servicer's website. Interest rates are high and projected to go up, it definitely wouldn't be a bad idea...