<p>So, my daughter's college has offered what is essentially a private loan from them in lieu of the unsubsidized Stafford, but the financial aid paperwork says we can request the unsub loan if we wish. I just don't know which would be cheaper in the long run. </p>
<p>Details of college loan: $2000. No interest accrues while in school. 6 year term at 6%. Payments start immediately after graduation. $33.15 payment, for a total payback of $2386.50. </p>
<p>Federal loan: $2000. Interest begins to accrue immediately. 10 year term at 4.66%. Origination fee (I'm not sure if this is the current fee, because the college included a little slip of paper indicating that rates rose from the 3.86% of last year, but pdidn't indicate anything about the origination fee) of 1.072%.</p>
<p>Is there a calculator of some sort online that I can use to see which loan has the total lower cost? I'm guessing it might be the school one even though it has the higher interest rate, because it has a shorter term and interest doesn't accrue while daughter is in school. She's a senior, so it is only one year of accrual if she takes the federal loan. Any math people out there who can see this more clearly than I can at the moment?</p>
<p>Never mind. I did some digging on finaid.org. Just plugging in numbers, without accounting for the accruing interest, the federal loan is more, I suppose due to the stretched out payments. I suppose she could pay it off faster, but I think the difference in monthly payment between the two loans was about $13.00. Hmmm. I suppose I should go back and calculate the interest as if she paid it on a six year term, but I still don’t know how to figure the accrued interest in there.</p>
<p>I believe the federal loan is simple interest, so you can just compute 4.66% of $2000 ($93.20) and add that to the loan each year. So at the end of 4 years, she’ll owe $2372.80 and you can plug that into the calculators. As you can tell (if the total given for the school loan is correct) she’ll accrue almost as much interest in the 4 years of school as she will in paying off the other loan over 6 years, and then she’ll still pay more interest over however long she takes to pay it off. This is because even though the federal interest rate is lower, you’re paying interest on the whole $2000 every year for 4 years, whereas with the other loan, she is paying it off each month during the period where interest applies, so soon she will be paying interest on a much smaller amount. So as long as she will be able to make the required payment for the 6-year term, she’s much better off taking the school’s loan.</p>
<p>This all assumes she’s a rising freshman. If she were a rising senior, it might be worth it to pay the interest while in school for one year in exchange for the lower rate.</p>
<p>The interest in school can make them close to even, though the Stafford is still cheaper. You can pay the loan off as fast as you want. The Stafford has much more flexibility if you run into trouble. I think that makes the Stafford a hands down winner. What if your daughter does not get a high paying job? The Stafford is much safer with its variety of deferment and repayment options.</p>