Do unsubsidized Stafford loans accrue interest while I'm in school? What if I don't pay them?

Paying for College
1

<p>I'm applying for scholarships and a summer job in the meantime in order to minimize the $9,500 I would need to pay in lieu of the Stafford loans I've been offered, but in the event that I find myself in need of a loan, I want to make sure I've got a full understanding of what I'm getting into.</p>

<p>"If you choose not to pay the interest while you are in school and during grace periods and deferment or forbearance periods, your interest will accrue (accumulate) and be capitalized (that is, your interest will be added to the principal amount of your loan)."</p>

<p>Does this mean that if I don't pay the interest on an unsubsidized Stafford loan for as long as I attend school, the amount I didn't pay on interest is added to the total amount the loan costs me?</p>

2

<p>for sub loans, the interest is paid by the federal gov’t as long as you are in school. Unsub loans start accruing interest. You can choose to pay the interest while you are in school or the interest just accrues and then you pay both the principal and the interest</p>

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<p>What does it mean when interest accrues? Say the interest is at 3.86% on a $6,000 loan, how would that look?</p>

4

<p>See <a href=“Accrued interest - Wikipedia”>http://en.wikipedia.org/wiki/Accrued_interest&lt;/a&gt;&lt;/p&gt;

5

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<p>The answer is yes and that’s what ‘the interest accrues’ means. </p>

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<p>Okay. Thank you for the help, everybody.</p>

7

<p>Do the math. 6,000 x 3.86% =$231.60 in interest for the first year. The interest gets added to the loan balance, so that if you don’t make a payment, the second year’s interest will be 3.86% of 6,231.60. And it goes on from there. Once you start making payments, the balance drops so the interest will also drop a bit. But over the ten years of repayment, you will end up paying a lot more than $6000 - more like $7500.</p>

8

<p>See <a href=“Granite State Management & Resources”>Granite State Management & Resources;

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<p>Can someone provide a link to an amortization schedule for unsub. student loans?</p>

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<p>^Google it. For example see file <a href=“http://student.aahanet.org/eweb/images/student/pdf/LoanAmortizationSchedule.xls”>http://student.aahanet.org/eweb/images/student/pdf/LoanAmortizationSchedule.xls&lt;/a&gt;&lt;/p&gt;

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<p>^^ Thanks for the link. HOWVER, according to the spreadsheet: “This model does not account for interest that is accrued during the in-school period.”</p>

<p>I’m looking for a calcuator that compute the interest from the time the unsub loan is taken.</p>

12

<p>The following discussion n FinAid.org gives a good example of capitalizing interest at work.</p>

<p><a href=“Your Guide for College Financial Aid - Finaid”>Your Guide for College Financial Aid - Finaid;

<p>In-School Deferment Inflates the Loan Balance</p>

<p>A dependent student can borrow $5,500 in Federal unsubsidized Stafford loans during the freshman year in college, $6,500 during the sophomore year, $7,500 during the junior year and $7,500 during the senior year, for a total of $27,000. An independent student can borrow $4,000 more per year during the freshman and sophomore years and $5,000 more per year during the junior and senior years, for a total of $45,000. (The aggregate limits of $31,000 and $57,500 for dependent and independent students, respectively, are higher because the aggregate limits allow for more than four years to complete a Bachelor’s degree.) The interest rate on the Federal unsubsidized Stafford loan is 6.8%.</p>

<p>Let’s assume that each year’s loans are disbursed in two equal installments, one in September at the start of the fall semester and one in January at the start of the spring semester. Let’s also assume that the student defers repaying the loan during the in-school period and the 6-month grace period, with the accrued but unpaid interest capitalized monthly. Let’s ignore any origination and default fees, which are usually deducted from the disbursements.</p>

<p>Then a dependent student who borrows the maximum amount of Federal unsubsidized Stafford loans will have a loan balance of $31,978 upon entering repayment at the end of the grace period. This is $4,978 (18.4%) higher than the $27,000 borrowed. The monthly payments under a 10-year repayment term will be $368 instead of $311 ($57 higher) and the total payments over the life of the loan will be $2,369 higher as compared with a borrower who pays the interest during the in-school and grace periods. That’s 8.8% of the amount originally borrowed. On a 20-year term the total payments are $4,614 higher and on a 30-year term the total payments are $7,177 higher.</p>

<p>An independent student who borrows the maximum amount of Federal unsubsidized Stafford loans will have a balance of $53,325 upon entering repayment at the end of the grace period. This is $8,325 (18.5%) higher than the $45,000 borrowed. The monthly payments under a 10-year repayment term will be $614 instead of $518 ($96 higher) and the total payments over the life of the loan will be $3,966 higher as compared with a borrower who pays the interest during the in-school and grace periods. That’s 8.8% of the amount originally borrowed. On a 20-year term the total payments are $7,721 higher and on a 30-year term the total payments are $12,007 higher.</p>

<p>Thus deferring the interest during the in-school and grace period increases the loan balance at repayment by about 18.5% and the total payments over the life of a 10-year loan by 8.8% of the amount originally borrowed. On a 20-year term the total payments increase by 17.2% of the amount originally borrowed and on a 30-year term the total payments increase by 26.7% of the amount originally borrowed.</p>

<p>On Federal PLUS loans and private student loans the added cost of deferring the interest is even higher due to the higher interest rates.</p>

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<p>Here’s a calculator</p>

<p><a href=“Your Guide for College Financial Aid - Finaid”>Your Guide for College Financial Aid - Finaid;

14

<p>Let’s say my D borrows $5500 during the first year and I want to make the interest payments for her. Then borrows $6500 the second year, and so on. Is there a calculator that will show how much the interest payment would be each month so I can budget for that? I’m referring to unsub loans.</p>

15

<p>It’s not a huge amount for the year. I think we paid under $300 a year. </p>

<p>When my kids graduated, they were also given a ONE time chance to pay off the interest prior to consolidating and repaying their Direct Loans. I don’t know if that is still the case…or not.</p>

16

<p>It’s not something you can get exactly with a calculator. These loans are distributed by semester, so the start date will vary by distribution date. The interest charges start a-running when the funds are dispensed. So for a year of college, you will have the first disbursement accruing interest from Aug or Sept, and the second one in Dec-Jan. I do believe you can set up an online account and watch the accrual. </p>

<p>So if you take out 4 years worth of loans, Perkins, Direct Student and PLUS, they will all be churning out interest at different times and at different rates. I believe, that though Perkins and subsidized Direct Loans do not have interest charged while in school the meter starts running at graduation though you have 6 months before making the first payment. Then there are deals that pop up at times to merge loans, or for auto pay and interest cuts if you make so many payments on time. It’s not as simple as applying a one size fits all calculator.</p>