how does the intrest work on loans?

[Andrea368]

Hey guys,

So im trying to wrap my head around all these terms and little catches when it comes to loans. I have a few questions that im having a hard time tracking down anwsers for. My school website shows ive been awarded 8.5k for sub stafford loans and ~36k unsubsidized. In addition i will need about an extra 20k. I am hoping to get that extra with gradplus rather than private, which if im reading right, is fixed at 8.5% rather than variable like private?
So these are my questions, I know subsidized loans dont accumlate intrest til after graduation. Do unsubsidized accumulate it yearly or monthly? and is the intrest from you previous year added to your principal the second year which would mean in essence you are going to be paying intrest on intrest after graduation?
Also how does this work after graduation? Is the intrested calcuated/added montly or annually and is it added onto your principle for the next months payment? Or do they calculate and add interest once per year? Do staffords and gradplus have prepayment penalities, or is that only private?

Are my calculations correct? If i come out with 162k in stafford loans at 6.8%(fixed for the life of the loan right), for the first year i would be paying 11k in interest alone, or do they reduce the principal on which the interest is calulated by a montly basis? Also if i did the NHSC with 25k per year repayment can i assume that 11k of that will go to interest that year and the 14k left over as well as what i continue to pay (2k a month or more is my goal) will go to principal, leaving me with 124k the second year with a total of ~8.5k intrest to pay for the year? and so on?

Im sorry if this is all jumbled and hardly makes sense, Im just trying to give myself a reasonable idea of what im dealing with when i get out of school. So i can come up with a good gamplan. I did luck out that my father offered to pay my intrest in school, i just dont know what im getting myself into after graduation.

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[TMP-SMX]

One thing at a time:

1)Grad Plus is fixed at 8.5%

2)No federal loans capitalize (interest on interest added to principal) until repayment (6 months post graduation). If you have $25000 in unsubsidized staffords you have $1700 in interest on the side (2500*.068). You will have another $1700 for those same loans after the end of your second year. Subsidized loans do not gain interest during in-school deferment. During repayment, the interest capitalizes quarterly at the most.

3)There is no prepayment penalty, however, if you have the cash to prepay you might as well not take out the loan in the first place. It is a losing proposition. The only way it might make sense is to pay $2500 in order to take the tax deduction assuming you have a spouse making money.

4)You have to split the amounts by year (and more accurately by disbursement which is twice a year). Your first semester M1 loans will have the most interest in their separate column because you had the money the longest. Your second semester M4 loans will have the least interest in their column because it has the shortest time. If you want to do the calculation, split it into 8 rows one for each disbursement during medical school. Then, for example, if you received $12500 for your first semester unsub stafford disbursement there would be 12500*.068/2=425 in interest built up by the time you receive your second disbursement of M1.

You lost me on your second to last paragraph so let me know if things are a bit more clear now. Keep in mind that you can't take that 20,000 more in grad plus you say you need unless your cost of attendance (budget set by the school) is enough. (You can't get more than your CoA in loans. In the past, it was possible with private loans that went directly to you without school approval, but those are rare these days. Your best bet if you need more is to talk to your FA office and tell them why you need more money.

 

[potato head]

hi TMP-SMX. i have a question:

i didn't realize unsubsidized loans didn't capitalize until repayment! anyways, while i'm in graduate school, how often will interest be applied to my loan? quarterly? biannually?

thank you!

 

[TMP-SMX]

All federal loans don't capitalize during school while in deferment so the interest is never applied to your loan. However, what I think you are wondering about is how the interest is added during school for unsub staffords/grad plus. Think about it this way. If you take out $20,000 in unsubsidized staffords, whether the interest adds daily or monthly it doesn't matter until repayment happens. Add an annual 6.8% to it, twice per year 3.4% to it, or monthly 0.56% to it it doesn't matter it all adds up to 6.8% total interest.

 

[potato head]

Add an annual 6.8% to it, twice per year 3.4% to it, or monthly 0.56% to it it doesn't matter it all adds up to 6.8% total interest.

i see! thanks TMP-SMX. you've been incredibly helpful.

 

[potato head]

oh! one more question. i'm tweaking my excel calculators (and i believe you have one too), so if i were to actually take out $12,500 in unsub staffords each disbursement (twice a year), how much interest would i accumulate by the time i graduate?

let me know if you can! thank you again.

 

[TMP-SMX]

I don't have a calculator but it's not too difficult to figure out.

M1S1 $12500
M1S2 $12500+12500*0.034 (425 interest)
M2S1 $12500+12500*0.034*2 (850)
M2S2 $12500+12500*0.034*3 (1275)
M3S1 $12500+12500*0.034*4 (1700)
M3S2 $12500+12500*0.034*5 (2125)
M4S1 $12500+12500*0.034*6 (2550)
M4S2 $12500+12500*0.034*7 (2975)

Principal: $100,000
Interest: $11,900
Total at graduation: $111,900.

 

[potato head]

thanks! calculator is correct.

and sorry for thinking you were someone else. i had this idea to start an excel sheet to organize projected interest and yearly expenses, which i believe is an idea i got from someone else here in the financial aid forum. ah well. i'm too lazy to look it up & it's not important anyways.

 

[potato head]

I don't have a calculator but it's not too difficult to figure out.

M1S1 $12500
M1S2 $12500+12500*0.034 (425 interest)
M2S1 $12500+12500*0.034*2 (850)
M2S2 $12500+12500*0.034*3 (1275)
M3S1 $12500+12500*0.034*4 (1700)
M3S2 $12500+12500*0.034*5 (2125)
M4S1 $12500+12500*0.034*6 (2550)
M4S2 $12500+12500*0.034*7 (2975)

Principal: $100,000
Interest: $11,900
Total at graduation: $111,900.

well, actually i do have one more question. sorry for taking over the thread, but maybe (i hope) this will help someone else on this forum.

anyways, the interest accumulated by M4S2 is $2,975. this is what the total would be at the beginning of M4S2, right? by graduation, then, would another interest amount be added to my overall total, so at the *end* of M4S2, my interest total would look like -

graduation/end of school: $12500*0.034*8 (3400)
Total at graduation: $115,300.

would this be wrong or right?

 

[TMP-SMX]

Makes sense. Then you also have to take into account the 6 month grace period after graduation prior to capitalization. So you'd add $3400 then $3825.