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Author Topic: Unsubsidized Stafford Loan - pay interest while in school?  (Read 15508 times)

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I have a few questions regarding the unsubsidized Stafford Loan.

First, should I pay interest while I'm in school?  It seems like the monthly payment would grow because I'll be borrowing from them each year.

Second, can I rescind a loan application?  I made some mistakes on the application/promissory note at Need Access, and I emailed them immediately afterwards about rescinding the application (obviously, no money been awarded and the application is still pending). 


qmmm

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Re: Unsubsidized Stafford Loan - pay interest while in school?
« Reply #1 on: May 08, 2007, 02:58:30 PM »

First, should I pay interest while I'm in school?  It seems like the monthly payment would grow because I'll be borrowing from them each year.

Depends.

The first thing you need to identify is how the interest is being capitalized.  The two most likely cases: (1) at the start of the repayment period or (2) monthly.  (1) is obviously better than two. 

For case (1), they'll ONLY be calculating the interest based upon your initial principal before your repayment period starts.  There it little incentive to send them money monthly, since you could make the interest payment all at once at the start of the repayment period.  If you opt for this action, its essentially cost neutral to you.  However, if you start to squirrel away those monthly interest payments into something like a money market (good one now are getting 4.5-5% interest) you will be making some money that you would otherwise have given away.  Another reason that this is a decent strategy is that now you have an in-case-of-emergency stash since you should be able to get to your money within a business week.

For case (2), if you wait to pay until the start of the repayment period, you'll be earning interest on the interest.  So if you squirrel your money into a money market like before, it'll cost you more.  You're money will be earning at 5% but the missed interest payments are collecting interest at 6.8%.  However, that cost comes with the advantage of still having the in-case-of-emergency stash.

My personal opinion is that the difference in interest for case (2) is pretty minimal -- provided that you are squirreling away the money -- for the fairly real benefit to having some emergency cash on hand.  Also, if you land a lucrative 2L summer associate position or hit the lottery, the emergency cash is less important.

Of course, this suggestion is pretty cursory.

As for your second question, every time you have a loan payout (2 or 3 times in a year depending on semester or quarter system) your principal will increase.  Thus, the interest payment will also increase regardless of whether we're talking about case (1) or (2).

P.U.S.H

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Re: Unsubsidized Stafford Loan - pay interest while in school?
« Reply #2 on: May 28, 2007, 02:11:23 AM »
I have a few questions regarding the unsubsidized Stafford Loan.

First, should I pay interest while I'm in school?  It seems like the monthly payment would grow because I'll be borrowing from them each year.

Second, can I rescind a loan application?  I made some mistakes on the application/promissory note at Need Access, and I emailed them immediately afterwards about rescinding the application (obviously, no money been awarded and the application is still pending). 



I just had the same experience with Access Group - filled out the app, and on the first page it asks if you want to pay the interest while in school. I checked "NO" but when I reviewed the promissory note, it checked YES >:(

I'm sitting at work now thinking "What the fresh hell?" because now I have to call them at 2am JKT to get this straightened out so I can get my money on time - OR - I have to fill out a whole new app, which could mean them checking my credit twice ???

Has this happened to anyone else and what did you do?
Everday I'm HUSL'in

The Poster

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Re: Unsubsidized Stafford Loan - pay interest while in school?
« Reply #3 on: May 28, 2007, 09:07:11 AM »
I have a few questions regarding the unsubsidized Stafford Loan.

First, should I pay interest while I'm in school? It seems like the monthly payment would grow because I'll be borrowing from them each year.

Second, can I rescind a loan application? I made some mistakes on the application/promissory note at Need Access, and I emailed them immediately afterwards about rescinding the application (obviously, no money been awarded and the application is still pending).



I just had the same experience with Access Group - filled out the app, and on the first page it asks if you want to pay the interest while in school. I checked "NO" but when I reviewed the promissory note, it checked YES >:(

I'm sitting at work now thinking "What the fresh hell?" because now I have to call them at 2am JKT to get this straightened out so I can get my money on time - OR - I have to fill out a whole new app, which could mean them checking my credit twice ???

Has this happened to anyone else and what did you do?

Correct me if I am wrong but I thought they didn't check credit for stafford loans? As I understand it all US citizens are entitled to borrow the max in unsub stafford for school pretty much no matter what. now gradplus, that's a different story. they will pull your credit report for gradplus.
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sharky

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Re: Unsubsidized Stafford Loan - pay interest while in school?
« Reply #4 on: May 28, 2007, 09:22:37 AM »
Even if they do check your credit (which they do on GradPlus, but as far as I know not on Stafford), you really won't take much of a credit score hit.  Lots of things affect your credit score but they're all weighted differently.  The category for "New Credit" is only weighted 10%.  And # of recent requests + amount of time that has passed since the request are only two of four subcategories under the "New Credit" 10%.

P.U.S.H

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Re: Unsubsidized Stafford Loan - pay interest while in school?
« Reply #5 on: May 28, 2007, 09:04:51 PM »
Thanks sharky... and The Poster, I was referring to the GradPLUS loan, as I would be signing a MPN through the Access Group for both (I think :-\)

It's been a while since I've done all this, and I'm actually reading through the paperwork as opposed to just signing like I did for undergrad.

qmmm I'm also a bit confused by your post. Are you saying we should not pay the interest and instead take the amount we would have paid and place it in an money market account? I got lost around the "earning interest on the interest" for Case (2) ???
Everday I'm HUSL'in

qmmm

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Re: Unsubsidized Stafford Loan - pay interest while in school?
« Reply #6 on: May 28, 2007, 10:50:22 PM »
qmmm I'm also a bit confused by your post. Are you saying we should not pay the interest and instead take the amount we would have paid and place it in an money market account? I got lost around the "earning interest on the interest" for Case (2) ???

I'm sorry if I was confusing.

In my opinion, having some money on hand in case of emergency is a pretty valuable thing.  So instead of making the interest payments, I'll be stashing money into a high interest savings account each month. 

Let's see if some numbers help...

Let's say you take out $10,000 in a lump sum @ 6.8% interest where the interest payment, if unpaid, get capitalized each month.

If none of the interest is paid, 36 months after the loan was taken out you would owe @12,255.92.  Thus, $2,255.96 is the total amount of interest that accumulated by not making a single interest payment.

The interest payment for the first month would be $56.67.  The interest payment for month 36 would be $69.06.

Let's consider what would happen if you save $57.00 each month, for 36 months, in a savings account that gets a 5% return/yr.  After 36 months, you will have $2,208.94 in your high interest savings account.

Thus the effective cost for not making the interest payments is $46.98(=$2,255.92-$2,208.94).

Obviously, most people are taking out more than $10k/yr.  At some point, it becomes really difficult to make a deposit into your savings account that's large enough to keep up with the interest payment when you're taking out 3 or 4 times as much out in a year. 

Anyway, I hope that clarifies things a bit.

qmmm

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Re: Unsubsidized Stafford Loan - pay interest while in school?
« Reply #7 on: May 28, 2007, 10:53:41 PM »
I suppose that I should also point out that I'm a chemist and not a certified financial adviser.  Take my advise with a HUGE grain of salt.

P.U.S.H

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Re: Unsubsidized Stafford Loan - pay interest while in school?
« Reply #8 on: May 29, 2007, 12:39:36 AM »
Actually that was really helpful, and I definitely understand. I wish someone had broken it down like that for me when I was taking out undergrad loans :-[

Now, I have to see if Access Group will change my MPN so I can sign it and start employing your advice ;)
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Re: Unsubsidized Stafford Loan - pay interest while in school?
« Reply #9 on: May 29, 2007, 04:26:57 PM »
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