Interest capitalization

[dantt]

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I have approximately 30k in accrued interest over the past 4 years of medical school and plan to be on IBR throughout residency.

Is it financially better to pay the accrued interest before it capitalizes or...

leave the 30k in the bank account at 1%, let the accrued interest capitalize, then have the government cover the unpaid interest quarterly for 3 years? Presumably, my IBR monthly payment won't be enough to even cover the interest on the principal at this point.

 

[DrMidlife]

leave the 30k in the bank account at 1%

Making 1% vs. letting it compound at a minimum of 3.4%?

have the government cover the unpaid interest quarterly for 3 years?

Where are you seeing that something is "covered"? The government isn't covering anything - you're just letting more interest accrue & compound. Which, if you have $30k lying around, is most likely a poor choice.

Also, if it helps you psychologically to separate out the interest that accrued while you were in school, fine, but there's no actual separation. It's all principal balance now.

Best of luck to you.

 

[dantt]

Making 1% vs. letting it compound at a minimum of 3.4%?

Where are you seeing that something is "covered"? The government isn't covering anything - you're just letting more interest accrue & compound. Which, if you have $30k lying around, is most likely a poor choice.

Also, if it helps you psychologically to separate out the interest that accrued while you were in school, fine, but there's no actual separation. It's all principal balance now.

Best of luck to you.

So my understanding is during the first 3 years of repayment, if your IBR payment is less than the interest that's acruing, the government covers the excess interest. A resident makes about 50k / year...which makes the IBR payment about 5k/year. A 200k loan at 6.8% interest makes the interest on a 200k loan 13600. The government then covers 13600-5000=8600. If it were now a 230k loan, the government would cover 15640-5000=10640. Wouldn't it be better to keep that 30k in a bank account, get the 1% interest, then pay the 30k towards the higher principal after your income starts to catch up with the yearly loan interest accruing?

 

[DrMidlife]

So my understanding is during the first 3 years of repayment, if your IBR payment is less than the interest that's acruing, the government covers the excess interest. A resident makes about 50k / year...which makes the IBR payment about 5k/year. A 200k loan at 6.8% interest makes the interest on a 200k loan 13600. The government then covers 13600-5000=8600. If it were now a 230k loan, the government would cover 15640-5000=10640. Wouldn't it be better to keep that 30k in a bank account, get the 1% interest, then pay the 30k towards the higher principal after your income starts to catch up with the yearly loan interest accruing?

The interest that the government covers only applies to subsidized Staffords, which med students don't get anymore, and which were only $8500/year of the loan package before this year.

http://studentaid.ed.gov/sites/default/files/income-based-repayment-common-questions.pdf

 

[DrMidlife]

Also, interest on unsubsidized loans capitalizes as you go. That $30k of interest is already principal - unsub loans compound & capitalize daily, as far as I can tell.

Whee.

 

[dantt]

Also, interest on unsubsidized loans capitalizes as you go. That $30k of interest is already principal - unsub loans compound & capitalize daily, as far as I can tell.

Whee.

Darn...forgot that it was subsidized loans only 🙁

That being said, unsubsidized loans don't compound and capitalize daily, they only do when you change payment status (going from in school to payment, deferment, forebearance yearly, etc). So if you do IBR, it capitalizes once at repayment.

 

[DrMidlife]

That being said, unsubsidized loans don't compound and capitalize daily, they only do when you change payment status (going from in school to payment, deferment, forebearance yearly, etc). So if you do IBR, it capitalizes once at repayment.

I have to do some more reading on capitalization rules.

Can I have some more variables please?