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Should I Pay Unsubsidized Interest While In School?

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Dr JPH

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Sallie Mae is giving me the option of paying the interest on my Unsubsidized loans while I am in school.

Anyone else doing this?

What are the advantages/disadvantages?
 

docuw

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With what will you pay it, dear Liza, dear Liza?
 

Dr JPH

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Oh yeah.

Duh.
 

mpp

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If you do manage to come up with the money to pay the interest it is probably not the best thing to do. The interest on the Stafford loan is not compounded, but rather capitalized. This means that the interest is not added to the principal until you go into repayment, i.e. once you finish school in four years.

It would be better (provided you have the self-restraint to do it) to place the money that would be used to pay interest on the Stafford loan in some income-bearing account (money market, CD's, etc.). Then you can pay all the interest that has accrued on the loan while you are in school at one time, just before it is capitalized.

Once that interest is capitalized, you will be paying interest on the interest.
 

analu

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nice suggestion, mpp:)
 

Dr JPH

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mpp

That is EXACTLY what I was planning on doing, I just wanted to see if someone else thought it was a good idea.

I have been looking at the numbers, and if my calculations are correct, I can actually help myself out by investing some savings while in school rather than using it to pay off interest.

Thanks.
 

mpp

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You can get a 2.5-year CD at 4.25 percent (www.1stsource.com) and that's about the best I've found right now. This is not going to beat interest accrual after taxes. The only benefit you have is that the Stafford loan rate is not a true APR since the compounding will only be in four years....the 4.25 percent on the CD is a true APY.

Other thoughts are some muni-bond funds so you don't have to worry about taxes (Vanguard Short Term Tax Exempt is a nice one but you do have to pay taxes on capital gains as opposed to interest earned). Unfortunately, due to the big drop in the equity market of late, a lot of money is going into these funds right now and so the share prices might be inflated. Although there might be a 6 percent annual return, the share price could easily fluctuate 5 to 10 percent...the complications of a big bear market...yuck
 
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