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...