newdude said:
hey guys,
i'm curious where do you get this money, i mean are you just gonna pay the interest from the loan you took out. That doesn't make sense, i mean wouldn't it be better to take smaller amount of loan out.
just curious.
thanks
p.s. what are ya'll doing up.
Someone help me out here because I'm not sure that I understand this...but this is the way that I think it all works.
It would be better to borrow a little (little being a relative term) more money than you need to pay the interest, so that when you graduate the interest is not added to your original loan amount. If that happens, then you get charged interest on interest! Who likes to pay interest on money that they never even received?!?!
So, my scenario, albeit unrealistic, has someone borrowing 10,000/year for four years with a 5% interest rate.
Time Loan Rate Accrual w/ Interest w/o Interest
MS1 10,000 0.05 500.00
MS2 10,000 0.05 500.00
MS3 10,000 0.05 500.00
MS4 10,000 0.05 500.00 12,000 10,000
MS2 10,000 0.05 500.00
MS3 10,000 0.05 500.00
MS4 10,000 0.05 500.00 11,500 10,000
MS3 10,000 0.05 500.00
MS4 10,000 0.05 500.00 11,000 10,000
MS4 10,000 0.05 500.00 10,500 10,000
So, by the end of four years you owe 45,000 on the 40,000 you originally borrowed. Which yes, it is a valid argument that you would have borrowed 5k more than you needed to keep that interest from accruing, but in your first year of repayment you won't be charged $250 of interest just on the interest you've already accrued.
40,000 * 5% = 2,000
45,000 * 5% = 2,250
Well, ok, so in my scenario, you're a doctor now. Who cares about the extra $250 in interest due to interest? Small potatoes, right? You've only increased your principal by about 10%. Back to the real world. I think med. students borrow ~ 20k/year and the interest rate is variable with a cap at 8.25%. (Right now, I believe it's 6.8%.) That turns the numbers into:
80,000 * 6.8% = 5,440
93,600 * 6.8% = 6,365
That almost $1000/year interest on money you never had! And you've increased your principal by closer to 20%. I guess I'd rather give them back some money to cover the interest than pay interest on the interest when I'm out of school.
Anyone else have input on this? Or am I just confused and confusing others?