Why do people complain that loans are hard to pay off?

[omegaxx]

What's so bad about a used chrysler? Either way, a doctor who has loans to pay off can always be thankful for one thing...the availability of a job. Unlike, say a lawyer, a doctor will rarely, if ever, not beable to find work. And last time I checked, and that would be everyday, because I work at a hospital, doctors tend to drive pretty nice cars, including the young ones. Sure, it's a pain, but paying off loans if far from impossible, and as long as you have a plan, talk to the right people, you'll be fine.

You do realize that >60% of the premed on this forum grew up in families making >150k per year do you? Hence all the woe is me.

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[imamom]

That is not true. I have a credit score in the mid 700's and med school student loans are still going to cost me 6.8%.

You're right. 6.8% is not pretty, but don't get me going about why the current administration is screwing over students. However, given the cost of borrowing to buy a business, for example, 6.8% is still not horrible.

If you're score is that good and you've used your credit so the banks like you, you might also borrow against a credit card--you should offers for 4.99% money or less (I do). Then put that card away (don't charge purchases on it) & religiously make the monthly payment. Not ideal, but better than 6.8%. I've actually thought of hitting up some of our wealthier friends & asking them if they wouldn't like to take a note at say, 5.4%. Got to think creatively and outside the box. I'll let you know what other ways I come up with.

 

[Sol Rosenberg]

This $1,200.00 insurance thing has really gotten everyone in a bunch. I stated earlier that I accidentally put my yearly payment down as a monthly. So I meant to say $100.00/month, not $1,200.00. Ah well.

My rant wasn't so much directed toward you, but more toward the people that backed you up, claiming that $1200/mo was, indeed, a reasonable sum to pay for insurance.

 

[NonTradMed]

You do realize that >60% of the premed on this forum grew up in families making >150k per year do you? Hence all the woe is me.

I'm starting to think that, particularly when, in one past thread, people complained that $150k was near poverty. Now, there are certain instances where this may be true (having 10 kids and living in San Fran for one) but it's ridiculous to use an outlier and project that onto the entire nation.

Sadly, I knew kids who thinks a six figure income was barely making it, even for a family of four living in the midwest.

 

[alwaysaangel]

I've actually thought of hitting up some of our wealthier friends & asking them if they wouldn't like to take a note at say, 5.4%. Got to think creatively and outside the box. I'll let you know what other ways I come up with.

Keep in mind that if you take out loans against friends you can't get tax deductions for your interest payments later on. Just something to consider...

 

[omegaxx]

I'm starting to think that, particularly when, in one past thread, people complained that $150k was near poverty. Now, there are certain instances where this may be true (having 10 kids and living in San Fran for one) but it's ridiculous to use an outlier and project that onto the entire nation.

Sadly, I knew kids who thinks a six figure income was barely making it, even for a family of four living in the midwest.

Yeah, ditto.

I grew up in Vancouver (not the cheapest of cities) in a single-family household making under 30k a year. I consider myself to be pretty well-off compared to many of my friends, one of who grew up in a family of 4 living on 15k a year. She's starting her MSTP at a top-10 American school this summer. How on earth she will survive as an academic making a six figure income I have no idea

 

[DoctorPLASTIC]

Keep in mind that if you take out loans against friends you can't get tax deductions for your interest payments later on. Just something to consider...

But you will save about 2% on the entire loan! JUSt something else to consider.

 

[p9142]

Are you being sarcastic?

No, the rates went up to 6.8% last year and now they are fixed. The days of 3-4% are over.

 

[Sol Rosenberg]

But you will save about 2% on the entire loan! JUSt something else to consider.

Whether this works out better or not depends upon your TOP tax bracket. As it stands now, most married doctors will probably fall in the 33% or 35% tax brackets (some maybe in the 28% bracket,) so, to first order, you are paying at most 0.77*6.8% = 5.24%, so you are coming out slightly ahead. Unfortunately, this number is skewed upward a bit since your top tax bracket will most likely be lower while in residency (but the juice is still running.)

That brings up another question. JohnMadden, is the capitalization treated as a lump-sum interest charge? That is, the year when your deferral ends and the capitalization of your interest occurs, do you get a student loan interest statement for say 100,000*0.068*4 = 27,200 interest on a 100k Unsubsidized Stafford Loan? (for the sake of this discussion, assume that all 100k was taken out at the beginning of M1, and no loans were taken out after that, to make my math correct.)

 

[deleted77919]

You guys are correct that while in school the loan is simple interest. However, the vast majority of that 30 year period is regular old everyday compound interest.

6.8% over a very long time with $250k in loans really adds up.

(Based on my school/circumstance, etc I will be $225k in the hole upon starting residency based on borrowing and simple interest collecting on the unsubsidized loans while in school assuming no tuition/fee increases, yeah, right. So $250k seems entirely reasonable).

I am also fairly certain that the interest capitalizes during residency deferment. Source: http://studentaid.ed.gov/students/p..._2004/english/repayment-options-deferment.htm

 

[Sartre79]

No, the rates went up to 6.8% last year and now they are fixed. The days of 3-4% are over.

Aren't the Dems working on (or have already passed) a bill attempting to cut the rates in half?

 

[p9142]

Aren't the Dems working on (or have already passed) a bill attempting to cut the rates in half?

They got you too. F$#%@ the politicians in this country. The dems ran on a campaign promise to cut the student loan interest rates in half. What they actually did once they got into power was totally different. They passed a phased interest rate cut on undergraduate subsidized Staffords, nothing else. We got totally screwed.

 

[JohnMadden]

That brings up another question. JohnMadden, is the capitalization treated as a lump-sum interest charge? That is, the year when your deferral ends and the capitalization of your interest occurs, do you get a student loan interest statement for say 100,000*0.068*4 = 27,200 interest on a 100k Unsubsidized Stafford Loan? (for the sake of this discussion, assume that all 100k was taken out at the beginning of M1, and no loans were taken out after that, to make my math correct.)

Sort of. The interest accrues daily. So if you took out 100K on the first day of medical school, you would accrue ~18.6 dollars/day in interest (100,000 * 0.068/365). So after four years, that 18 per day equates to the 27,200 that you mentioned above.

The capitalization isn't a lump sum "charge" per se, because you've already accumulated the debt over the four years (This is why it's best to minimize unsubsidized loans during the early years of med school). Capitalization gives the lender the opportunity to create a new principal amount and get more money over the life of the repayment period...

Option 1: Pay off interest before capitalization
Pay 27,200 in interest before repayment (start of residency for most people)
100K repaid over 30 years @ 6.8% = 651/month;

Total payments = 27,200 + 651*360 = ~262K

Option 2: Capitalize Interest
Allow 27,200 to be capitalized to create new principal amt of 127,200
127K repaid over 30 years @ 6.8% = 829/month;

Total payments = 829 * 360 = ~299K

Using this example, you would pay approx 37K more in interest over 30 years if you capitalized the interest.

Note: Each person should consult a financial advisor that is NOT associated with the lender about what is the best course of action. It may not be in your best interest to give up a significant cash position to pay the lender the accumulated interest.

Lastly, it makes NO sense to pay accumulated interest when you receive quarterly interest statements from the lender. The ONLY time you should pay off the accumulated interest, if you choose to do so, is RIGHT before you graduate. You may want to give yourself a 3 month window just to be on the safe side (say March of MS-4). There is no added benefit to paying interest in year 1 as opposed to year 4 (in fact, you just help the lender make money) . However, if you have no self control and feel that you may spend the cash on something else, then this may not apply.

I don't believe that paying 27K in year 1 is worth saving 36K in interest, based on the time value of money. But this would assume that you actually save/invest the money with some reasonable return. Given the recent market pullback, I am VERY bullish right now, but I'm a contrarian investor.

Jota, I've been getting hammered in the market recently. I may have to turn to a more balanced investment plan during med school...

 

[JohnMadden]

You guys are correct that while in school the loan is simple interest. However, the vast majority of that 30 year period is regular old everyday compound interest.

I hate to be that guy, but this is wrong also... The principal amount is amortized, which is different from compound interest. The equation for amortized payments can be seen here.
http://en.wikipedia.org/wiki/Amortization_calculator

This is very helpful in understanding mortgages as well as student loans.

The monthly interest portion of your 1st monthly repayment of $651 is calculated by taking the periodic rate .068/12*100,000= 566. In other words, you only paid off $84 in principal.

A lot of lenders will capitalize interest accumulated during a deferment/forbearance for all applicable loans. Check with your lender
For the second month, your payment would still be 651 but this time you pay a little less in interest because the principal is reduced by a whopping $84.
This time your interest portion of the payment would be .068/12*99,916. And so on.

 

[deleted77919]

I hate to be that guy, but this is wrong also... The principal amount is amortized, which is different from compound interest. The equation for amortized payments can be seen here.
http://en.wikipedia.org/wiki/Amortization_calculator

This is very helpful in understanding mortgages as well as student loans.

The monthly interest portion of your 1st monthly repayment of $651 is calculated by taking the periodic rate .068/12*100,000= 566. In other words, you only paid off $84 in principal.

A lot of lenders will capitalize interest accumulated during a deferment/forbearance for all applicable loans. Check with your lender
For the second month, your payment would still be 651 but this time you pay a little less in interest because the principal is reduced by a whopping $84.
This time your interest portion of the payment would be .068/12*99,916. And so on.

You are correct, I suppose I was unclear/mispoke (mistyped?). What I intended to say was that the vast majority of the time you are paying off the loan the way the interest is calculated is not the "simple interest" method where the interest does not capitalize, but rather the standard amortization method (see your local friendly financial calculator, or excel spreadsheet). And thus the benefit of "simply interest only" on the unsub Stafford is minimal b/c it is only in effect during your medical school years. Not during deferment. And not during your repayment.