Paying Off Interest?

[Street Philosopher]

I have about 10,000 in loans right now. Should I pay off the interest, which is around $20? If I don't it will be compounded. What are the pros and cons? If I don't pay it off now, how much will it cost me 5 years down the line?

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[mpp]

It depends on the interest rate and how often it is compounded/capitalized. I assume you mean that the interest is $20 per month.

If the interest rate is 2.4% capitalized annually (that would lead to a $20 interest payment for the first month), then the difference between paying it off as the interest accrues and waiting 5 years to pay the interest in one lump sum would be about $59. If it is capitalized monthly, the difference would be about $74.

 

[Street Philosopher]

thanks mpp, it doesn't seem worth it to pay it off now for such a small amount later. i think i'll blow off the 20 bucks on something stupid. weeee 🙂

 

[mpp]

I hope it isunderstood that there will still be more than $240 in interest accumulating each year. Those differences I have given mean that if you pay the interest as it accrues, you will have paid $1200 over 5 years. Letting it accumulate you will have $1259 or $1274 of interest to pay at that time.

 

[Street Philosopher]

thanks, i do remember that i'm still paying off the 10K loan. i wish i could somehow make that go away... that would be a good trick. 🙂

 

[edmadison]

Actually, there is a good reason to pay your interest at certain times, but it won't apply to everyone. Interest is deductable on your income tax but there is an income phase out. It is likely that many docs post-residency will make too much to qualify for the deduction. Thus, if you have a spouse that works and a reason to itemize your taxes (such as owning a home), paying your interest may make since even if you loans are currently in deferral.

Ed