<p>My S is a rising college sophomore. He is working an internship position this summer and will net more than he needs for the student contribution to his college costs. His financial aid package includes $7500/year in loans, $3500 of which is unsubsidized Stafford loans accruing interest while he is in school. </p>
<p>Between the options of paying off the existing loans or just taking out fewer new loans, is there any practical difference? Assume he spends the same money either way. So suppose he has $2000 to reduce his loans. In terms of the loans themselves, if the interest rate is the same both years, I can't see any difference. But may be there are other factors to consider.</p>
<p>His $3500 loan is now up to about $3700. If he puts down $2000 on that loan and then takes out a new loan for $3500 he now has a total of 1700+3500 = 5200 in unsub loans. If he just takes less new loans, he'd have $3700 + 1500 = 5200 -- exactly the same.</p>
<p>So are there any other factors to consider, or are both options effectively identical?</p>
<p>The new loan will have an origination fee - I think the current fee is 1%. So out of a $2000 loan he would actually receive $1980.</p>
<p>On the other hand, the interest is around $11.33 a month, so if the $2000 was paid off for a couple of months or more it might be marginally beneficial.</p>
<p>Obviously that would be ideal, but I don’t think he’ll have enough cash left over at the end of the summer to do both. He’s pretty frugal though, so it’s possible he can pay off the existing loan and still take out less in new unsub loans. I may also ask his school if they can adjust the mix of sub and unsub loans in this year’s package. (Some of his loans are through the school, and they are at a higher interest rate than the Staffords, but don’t accrue any interest while he is in school, so they’re still better than unsub Staffords, and they put $500 less of his loans in that form this year.)</p>
<p>Don’t take out any more loans and leave the old loans alone. Not only will you not have the origination fees, you won’t be “stirring a pot”. Each time you go through a process to borrow, to pay pack, you are taking a chance that something goes wrong. Not to mention the time spent in applying, going through the inof session and taking the “test” proving that you understand the implications of the loans. All time that can be better spent. </p>
<p>If he can spend just a little time, and al little money, how about paiying the interest accruing on those old loans AND not taking out new ones. Does n’t sound like a big deal, but in a few years those few dollars he spends each month on just keeping the interest from accruing can add up to a big differnce. Maybe you can come up with a little bit too, so that maybe even $10 of principle can be paid off each month. It’s those little drops of water and little grains of sand that make a difference.</p>
In our experience, these were a one off thing at beginning of attending a particular school. The counseling sessions etc are not done every year, just once (plus an exit counseling session at graduation). And there is no time spent in applying as Stafford loans are direct through the school, not through private lenders as in the past. All my kids ever had to do was go online at the school and accept or decline the loan.</p>
<p>I don’t disagree that it is probably better to avoid the new loan, but the reasons outlined above don’t apply in our experience except for students attending a new school or borrowing federal loans for the first time.</p>
<p>Interesting about the lack of grace period on the new loans – another vote for avoiding the new loans before paying down the old.</p>
<p>cptofthehouse, we are not planning on paying on his loans, not even $10/month. Of all the schools he was accepted to, he chose the one with the highest cost to us and the most loans to him. We supported that decision, but those loans are his, and he understood that that was the deal going in. </p>
<p>And frankly, considering his income compared to his responsibilities, he probably has more disposable income than us right now! </p>
<p>All the same of course we want to counsel him as to how best to handle them and keep his overall balance as low as practical. He’s smart enough to understand compound interest, and we will continue to advise him to make payments as he is able to keep them down, but this is ultimately his choice as a young adult. He hasn’t taken the time to figure out how to make payments toward his loan balances yet, but we’ll strongly encourage him to do that this summer while he has time on his hands.</p>
But the grace period change is just for interest on new subsidized loans. Unsub loans never had a grace period for interest. So i don’t really see how this impacts your decision. Now if you were talking about subsidized loans, this would make a difference.</p>
<p>Another thing to consider. I have read stories of students making payments and they are applied to the subsidized rather than the unsub loan. If your son were to go the route of paying off an old loan, he would need to make sure that the payment would go to the correct loan. It seems that this shouldn’t be a problem, but i remember a long thread about this issue a while back.</p>
<p>Probably an additional reason to avoid the new loan rather than pay part of an old one. Simpler.</p>
<p>For his first year his “subsidized” loan (high interest rate but does not accrue until after graduation) was from his school and his only Stafford loan was unsub so paying off the wrong federal loan should not be an issue.</p>
<p>For his second year he got offered a very small Stafford sub loan, which I don’t understand as our EFC is higher this year than last. But we’ll take it as it is by far the best loan out there!</p>
<p>Can anyone explain how subsidized stafford eligibility is computed?</p>
<p>Freshman year he had
Unsub Stafford $3500
School-based $4000</p>
<p>this year he has been offered
Fed Direct Subsidized Ln 12-13 810.00<br>
Fed Direct Unsub Loan 12-13 3,690.00<br>
School-based Loan 3,000.00 </p>
<p>which is better overall but also includes more unsub stafford, but hopefully he can avoid most or all of that this year.</p>
<p>Thanks. I think what happened was that our EFC went up but our grant aid went down by more, leaving a sliver of eligibility there. I’ve appealed the decrease in grant aid though, so I guess if I’m successful he may lose the subsidized Stafford eligibility.</p>