<p>In less than six months the first payment of my (only subsidized and unsubsidized) federal student loans is due. My initial plan was to go back to school, yet over the summer I decided that I should wait, for at least a year or two—I require a hiatus: I want to gather work experience for my resume. For personal reasons, I will not be stating my intended major or detailing what kind of work and developments I need, yet ultimately (very importantly) I don’t think I will be making enough or barely anything as income. My concern is that I need to call my loan provider and ask them whether it is possible to minimize the payment. Currently it is a standard plan of ten years, yet the monthly payment is more than I think I can handle at this time. Yes, I plan to ask these questions to my loan provider, yet for now as a starting point I would like second-hand information.</p>
<p>1) If I am not making income, do I qualify for an alternative plan? If not, may I extend the years, minimizing my monthly payments?
2) If possible, can I sometimes pay significantly more than my monthly payment? </p>
<p>I might as well add that I have significant savings and a living arrangement. This decision is important to me, yet before I make that call---I want to be informed, so that I know what to look for as I gather more information. These are just STUDENT loans; not private, so I was told I should be fine (given the added interest) as long as I pay the monthly minimum. </p>
<p>Ok, I’m going to add a little more to my concern. My plan was always to pay the minimum. However, I decided to take a “gap year”, so I want the minimum to be, well, MINIMUM. Not $0 though as I heard possible for someone almost like me who is considering IBR.</p>
<p>1) What exactly determines the minimum monthly payment? I think I know from my crummy experience of paying a few bills, there is always two options: a minimum, and what you ought to pay (a larger sum, based on the annual interest, and with loans, the minimum years to pay them off).
2) Is it possible to pay the minimum, or interest only, for a year or two?
3) Can I pay more through a separate check for “principle only”? </p>
<p>IBR is based on your income. Pretty simple. You establish your income with the servicer and they figure out 10% of the amount over a base exemption. If you are making little, you will probably be required to pay nothing. Interest will continue to accrue.</p>
<p>You can always make a payment, but you cannot direct them how to apply the payment. If you have interest accrued, the servicer will most likely apply all payments to interest first, then principal. If your interest is all paid, then you can request they apply any payments to principal rather than prepay interest. You need to check your loan documents to see if interest is paid first (usually), then fees/cost, and finally principal.</p>
<p>From what I have heard, you can pay minimal amounts (or nothing at all) for your Direct student loans if you have zero income. Essentially, paying $0 is possible if you make arrangements with the servicer - however not recommended. I believe that your payment is always going to go towards interest first if it is not paid off yet. </p>
<p>1) Is it possible to pay the interest in one go? Haha, I think I finally understand why my friend (who manages money) sounded grave about “you SHOULD have ALREADY been paying interest”. Is the loan provider not going to let me pay that in one go??? </p>
<p>2) Please, I really want a head start here. Am I right in thinking that interest and principle are two separate balances? What exactly grows and makes paying off the loan a horrible, horrible thing? In my mind, the interest is increasing, yet the principle should always remain the same.</p>
<p>3) I read something about payment being $0 yet interest still accruing. I don’t understand this, yet it sounds similar to the option of not paying anything at all while in school. Even if it says $0, can I still send some money? This question kind of requires the first two answers.</p>
<p>Thanks so much!! </p>
<p>EDIT: doing my best not to flood comments. Thank you Thumper1! Yes, I know that… It’s kind of late. I’m wondering if I can pay that portion off though. HOWEVER, even if I could, would the monthly payments get any bigger? Now I’m worrying that interest makes the payment low.</p>
<p>1) The loan provider will let you pay the interest, however - if you do not pay the entire amount of the loan (amount of principle remaining), interest will still continue to accrue. </p>
<p>2) Now that you are out of school, the principle is increasing - due to a concept called ‘capitalization’. Capitalization increases your loan principal balance and you will then have to pay interest on the increased loan principal amount. If you allow interest to be capitalized, the total amount you repay over the life of your loan will be greater than if you paid the interest as it accrued (this time period was while you were in school/6 month grace period).</p>
<p>3) Even if you qualify for forbearance or an income based repayment plan - where you are not required to pay anything, you should still be able to make a payment if you wish. From this point on, interest will accrue daily, regardless if you are qualified to pay nothing. </p>
<p>Asking for more clarification. Throwing me off is the loan term. </p>
<p>When looking online, I hear either 10 or 15 years. Given capitalization, I’m not sure how my numbers look right now… Can the loan term be any longer than 15? Is capitalization/interest fixed, so that my loan provider can help me pay the total off at a steady pace? I feel that only people whose loans are above 40k can request more than 15 years loan term.</p>
<p>Interest on a gov’t backed loan (Stafford) is not capitalized, so the principal does not continue to grow (unless you default). It is like there are two balances, the principal and the interest. The loan terms will dictate how payments will be divided between interest and principal, but most loans apply payments to interest, charges, then principal.</p>
<p>As an example, if you borrow $10,000 during undergrad, if some was unsubsidized, there will be some interest accrued at graduation. Let’s say $200. If you start paying $50/mo after grad, it will take 4 months to pay off the interest, but in the meantime more interest will accrue. With the fifth $50 payment, you will finally pay some principal.</p>
<p>If you make no payments, or $10/mo payments, you can see that you’ll be paying interest only for a lot longer and the interest ‘bucket’ will continue to grow. The principal will remain the same.</p>
<p>My grace period is not up. Does capitalization only affect interest? In other words, should my already accrued interest be paid before grace period ends, what’s left? The principle balance and annual (loan term) interest?</p>
<p>Between–thanks so much for this discussion! I don’t have anyone right now to talk about this…and it’s basics.</p>
<p>Any accrued interest leftover after your grace period is up is then added to the principle - this is capitalization. If you continue to pay the accrued interest until your grace period is up, there will be little to no interest added on to the principle when your payment plan is calculated. The loan does continue to accrue interest while you pay, but the capitalization does not begin until the grace period is over. Thus, the more you can pay while you are in your grace period, the smaller the principle when your grace period ends. </p>
<p>I’m thinking about this more. Let’s say, it’s only my principle balance. Annual interest included obviously. I read in an old thread that you can pay more than the monthly balance–up to the principle balance. The problem that seems to happen is that the loan provider might use these amounts to pay interest only ahead of time, sometimes making future bills $0. If I do good, paying monthly, can I send a separate check to pay the principle balance? </p>
<p>I want to keep costs low during my gap year, yet if I ever come across more, which I might, I want that to go to the principle, trying to pay the loan off faster. </p>
<p>That is definitely a good question, and this exceeds my knowledge. I hope someone on CC might know a little more than I do, but this is probably better discussed by your lender. Have you contacted them yet? </p>
<p>Also, a couple more thoughts following my last reply: I have a hunch that kind of incentive might backfire on me, but I want to believe that kind of effort does pay off. I read that it’s better to pay what’s left rather than chipping at it whenever I can throw in more money BECAUSE interest. </p>
<p>The article makes it seem like there is a gray area as to where exactly your extra money is being applied. I would imagine if you specify where the funds go directly, your lender hopefully would comply (like the other posters had mentioned). </p>
<p>The Direct Loan Exit Counseling does state that interest begins to capitalize as soon as the grace period is up. I listed the link in an earlier post I believe. </p>
<p>Ok. I’m back with ANOTHER QUESTION. It seems general, so I’ll see if anyone here has a thought. (I’m finalizing my questions for the loan provider).</p>
<p>I was thinking about consolidating my loans, yet I only have four different ones, and their due dates are the same. However, it might be better to consolidate them anyways.</p>
<p>1) Are standard and extended terms only available for consolidated loans? That would make sense because together they’re larger and would qualify for extended plan. Again, my aim is to make this manageable for me, so maybe I should highly consider this option. Or, maybe it’s a MUST to BE considered. </p>
<p>2) One of my loans has a higher interest rate, so I was thinking to consolidate the other three with a lower interest rate. Generally, does consolidation increase or decrease the interest rate? In my mind, the provider is going to average them out. </p>
<p>I find it very helpful when advising students. Depending on the type of loans you have and when you borrowed, you may be eligible for an extended plan (up to 30 years). Consolidation takes the average of all of your interest rates to determine your new consolidated rate. </p>