Paying interest while in school

[J.opt]

I have heard read somewhere that students with private loans should start paying the loan’s interest while in school, instead of capitalizing the interest. Can anyone give me more info on this?

Is this interest over the money that they have already given me, or is it over the entire loan amount? (i.e. would my interest payment on my first year be less than my payment on my 4th year?)

About how much would this payment amount to? (say if your borrow 100K)

Thanks.

---

Members don't see this ad.

 

[edmadison]

I have heard read somewhere that students with private loans should start paying the loan’s interest while in school, instead of capitalizing the interest. Can anyone give me more info on this?

Is this interest over the money that they have already given me, or is it over the entire loan amount? (i.e. would my interest payment on my first year be less than my payment on my 4th year?)

About how much would this payment amount to? (say if your borrow 100K)

Thanks.

The advantage of paying the interest off while in school/residency is that 1) you will keep the debt from building up and 2) you will be able to deduct the interest (really only important if you or your spouse have an income); once you finish residency, you will very likely make too much money to receive the interest deduction.

Ed

 

[mpp]

Check the details of the loan. For federal loans the interest is not capitalized until you enter repayment...which means that paying interest as you go along is no different then paying all the interest in a lump sum once you enter repayment (therefore it is beneficial to invest the interest you would be paying as you go along and then pay it as a lump sum when you enter repayment). For private loans, interest may be capitalized more frequently (i.e., prior to entering repayment). If so, it would likely benefit you to pay interest as you go along to prevent having to pay interest on interest.

Regardles of the loan type, you will only be charged interest on money already received...not on future lending.

Your interest payment would depend on the interest rate. If your loan is 100k and has a 4% APR (annual percentage rate) then your interest will be 4% of the 100k or $4,000 per year ($333 per month). If you waited 4 years to pay back any interest and the interest is capitalized annually, you will owe approximately $117,000 when you start repaying your loan.

Once you enter repayment, however, you will pay some principal each month so your interest accrued each month goes down a bit. For example, using a 100k loan at 4% paid in full over 10 years, your monthly payment is $1012. On your first month of payment $333 out of the $1012 is interest. But by the time you are 5 years into repayment only $186 of your $1012 is interest.

 

[J.opt]

Thanks a lot for the info.

Since loan terms depend on personal factors such as credit history, how do I know that the private loan a certain bank is offering me is the best I can get? Do I have to apply at several banks and then pick the one that works the best for me?

Is there something like lendingtree.com but specialized in student loans?

Thanks Again.

 

[mpp]

You'll just have to shop around or talk to others that have done the same. Compare rates and read the fine print carefully. The best thing would be to avoid private loans if you can because you'll likely run into problems later having to pay back the loans during residency when you may not be able to afford it. The federal loans are the best option because they offer flexible deferment options.

 

[J.opt]

...The best thing would be to avoid private loans if you can because you'll likely run into problems later having to pay back the loans during residency when you may not be able to afford it. The federal loans are the best option because they offer flexible deferment options.

Yeah, I guess federal loans are better, but I’m from Venezuela, therefore I’m pretty much stuck with private loans.

 

[J.opt]

Guys,
I was looking at several private lenders' websites, and I haven't seen anyone offering fixed interest rates. Are fixed rates only from the government, or are there private lenders that offer them as well?

 

[mpp]

Most student loans are variable rate loans. Even the government loans are variable rate loans (except for Perkins loans which are fixed at 5 percent but have a low maximum loan amount).

 

[InfraMan]

I start as an MS1 this August. I think I'm going to pay the interest as I go along.

mpp said:
"...which means that paying interest as you go along is no different then paying all the interest in a lump sum once you enter repayment "

The only reason I would disagree is this (from the IRS website).
1. Maximum yearly tax deduction for student loan interest is $2500 per year. $333/month will quickly exceed this.
2. That $2500 is reduced if you make over $100k per year.
3. My wife makes decent money, so a) we could benefit from the deduction this year and b) once I'm in residency, her salary plus mine might put us over $100k, especially if I moonlight.

In the end, it's probably not a big difference either way, but I'm cheap and try to save every dollar I can. I'm going to pay the interest this year and see what my tax return looks like.

 

[mpp]

Sounds like a good idea. Just don't pay over $2500 in interest per year and you'll be maximizing your tax deduction benefit including with the non-compounding interest while the loan is on in-school deferment.

 

[bmcgilligan]

I talked to my father-in-law, who is an actuary, about this very thing. He said that paying interest while in medical school didn't make sense because if you spend money on interest payments, you'll just have to take out more in loans to afford to make your payments. Why pay off a loan with a loan?

 

[J.opt]

I talked to my father-in-law, who is an actuary, about this very thing. He said that paying interest while in medical school didn't make sense because if you spend money on interest payments, you'll just have to take out more in loans to afford to make your payments. Why pay off a loan with a loan?

Exactly, I think that the people who pay interest during school (as InfraMan plans to do), are people who have a source of income to make those payments. As you said, it would be non-sense to pay loans with borrowed money.

 

[J.opt]

Lenders set interest rates based on the Prime Rate, LIBOR, etc. Does it make a difference which one they use? Are some of these indexes more stable than others? And by the same token, are there any indexes that historically seem to fluctuate a lot, and that I should stay away from?