Law School Discussion

Deciding Where to Go => Financial Aid => Topic started by: - on May 07, 2007, 07:21:31 PM

Title: Unsubsidized Stafford Loan - pay interest while in school?
Post by: - on May 07, 2007, 07:21:31 PM
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). 

Title: Re: Unsubsidized Stafford Loan - pay interest while in school?
Post by: qmmm on May 08, 2007, 11:58:30 AM

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).
Title: Re: Unsubsidized Stafford Loan - pay interest while in school?
Post by: P.U.S.H on May 27, 2007, 11:11:23 PM
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?
Title: Re: Unsubsidized Stafford Loan - pay interest while in school?
Post by: The Poster on May 28, 2007, 06:07:11 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.
Title: Re: Unsubsidized Stafford Loan - pay interest while in school?
Post by: sharky on May 28, 2007, 06:22:37 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%.
Title: Re: Unsubsidized Stafford Loan - pay interest while in school?
Post by: P.U.S.H on May 28, 2007, 06:04:51 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) ???
Title: Re: Unsubsidized Stafford Loan - pay interest while in school?
Post by: qmmm on May 28, 2007, 07:50:22 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.
Title: Re: Unsubsidized Stafford Loan - pay interest while in school?
Post by: qmmm on May 28, 2007, 07:53:41 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.
Title: Re: Unsubsidized Stafford Loan - pay interest while in school?
Post by: P.U.S.H on May 28, 2007, 09:39:36 PM
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 ;)
Title: Re: Unsubsidized Stafford Loan - pay interest while in school?
Post by: Forget Money, Read a Book on May 29, 2007, 01:26:57 PM
tag
Title: Re: Unsubsidized Stafford Loan - pay interest while in school?
Post by: Uptown *2*L on May 29, 2007, 01:40:28 PM
The answer to OP is:

YES, if you're planning on working BIGLAW (or making well into six figures) after graduation AND you can afford it.

Student Loan Interest is deductible, up to $2500, but is phased out above $105k and COMPLETELY phased out after $135k.

This means that it makes Good Fiscal Sense to pay your SL interest out of your SA earnings (or savings), while in school. You get the double-bonus of deductability and not having the interest capitalized. IMHO, the extra boost of having the deductability makes this worth it, though I'll admit I haven't actually run the numbers...

http://www.irs.gov/faqs/faq-kw187.html
Title: Re: Unsubsidized Stafford Loan - pay interest while in school?
Post by: qmmm on May 29, 2007, 02:16:15 PM
First of all, a tax deduction while your making essentially nothing at the beginning of law school does you little good.

Secondly, between graduation and Dec. 31st, even if you are working biglaw, you won't make six figures.

The following is a slight elaboration on the 'you can afford it' presented by the previous poster. I do agree that if you have a lucrative 2L SA position making a $2500 interest payment does make sense.  It doesn't make sense to pay more if you will have to take out more loans for your last semester or bar study.


Title: Re: Unsubsidized Stafford Loan - pay interest while in school?
Post by: lru22 on May 29, 2007, 04:33:37 PM
ok....i'm confused ??? so is it better to pay interest while in school?
Title: Re: Unsubsidized Stafford Loan - pay interest while in school?
Post by: P.U.S.H on May 29, 2007, 05:49:00 PM
lru22 From what I understand and how qmmm put it, the answer is no.

If you have that much left over every month in your budget to pay the interest, per the advice above, put it in an account, accrue interest, and pay it off when you get your first bill with that instead of your first paycheck.

Sounds about right to me :)
Title: Re: Unsubsidized Stafford Loan - pay interest while in school?
Post by: qmmm on May 29, 2007, 06:17:48 PM
ok....i'm confused ??? so is it better to pay interest while in school?

It depends. 

I've mentioned some reasons to not pay. LDPYYKM mentioned some reasons to pay. 

Not every situation is the same because everyone is taking of differing amounts of debt, already have differing amounts of preexisting (UG, car, credit card) debt, and have different potential incomes while in school.

If you have no savings and no source of income, in my opinion, you should not make interest payments.  Once you have established some savings, you can then consider whether interest payments makes sense for you.  This goes back to the 'Can you afford it?' question.

There's another issue that hasn't really been mentioned explicitly; some people make all of the financial decisions based entirely on what will cost them less, while others are willing to pay a bit of a premium for less tangible benefits like financial flexibility. 

Establishing some savings in an intangible benefit that will cost some money in the long run (see me example above).  To me that flexibility is worth the extra cost.

If you are really having a hard time figuring out whether paying the interest while in school makes sense for you, I think that you should contact to professional financial adviser that can go over in detail your particular situation.

Title: Re: Unsubsidized Stafford Loan - pay interest while in school?
Post by: lru22 on May 29, 2007, 06:57:40 PM
ok....thanks for clarifying it for me.In my situation, pay no interest while in school. Thanks.
Title: Re: Unsubsidized Stafford Loan - pay interest while in school?
Post by: lindenksv on June 04, 2007, 08:40:45 AM
I could be wrong, but you're also not losing anything by saying yes to paying interest payments while in school. It gives you the option to, but you are not under obligation to do so. So if you change your mind and don't pay or don't pay for a particular month, it has no effect on you than if you had said no from the get-go.
Title: Re: Unsubsidized Stafford Loan - pay interest while in school?
Post by: qmmm on June 04, 2007, 09:34:37 AM
I could be wrong, but you're also not losing anything by saying yes to paying interest payments while in school. It gives you the option to, but you are not under obligation to do so. So if you change your mind and don't pay or don't pay for a particular month, it has no effect on you than if you had said no from the get-go.

I'm not sure that you can claim that you are 'not under obligation' to make the interest payments.  I suspect that this is strongly dependent on the particular lender and you may be obligated to pay or suffer some sort of penalty.  I further suspect that for private loans, especially those that tie your interest rate into your repayment plan, you would be obligated to pay on time.

Besides, if you say that you won't be making interest payments while in school, you certainly are 'not under obligation' to pay.  However, the lender will always accept payment.  In fact, most loan agreements that I have investigated contain a clause that if you return part of a loan payout within 120 days from the time of issuance, it will be as if you had never taken out the money in the first place.  That is effectively a 4 month interest free loan for the portion returned.
Title: Re: Unsubsidized Stafford Loan - pay interest while in school?
Post by: The Law on June 04, 2007, 10:57:12 AM
tag.... this is all quite informative
Title: Re: Unsubsidized Stafford Loan - pay interest while in school?
Post by: LBChic on June 07, 2007, 04:47:18 PM
Minor point, and I'm not trying to be romantic, but what if you end up getting married in LS? The year I got married, our combined incomes were just enough to knock me - and my husband - out of being able to deduct SL interest.
 >:(

I will probably be paying interest on mine while in school.


First of all, a tax deduction while your making essentially nothing at the beginning of law school does you little good.

Secondly, between graduation and Dec. 31st, even if you are working biglaw, you won't make six figures.

The following is a slight elaboration on the 'you can afford it' presented by the previous poster. I do agree that if you have a lucrative 2L SA position making a $2500 interest payment does make sense.  It doesn't make sense to pay more if you will have to take out more loans for your last semester or bar study.



Title: Re: Unsubsidized Stafford Loan - pay interest while in school?
Post by: kirkcameronsgf on June 11, 2007, 01:28:09 PM
tag
Title: Re: Unsubsidized Stafford Loan - pay interest while in school?
Post by: The Poster on June 11, 2007, 04:49:39 PM
new plan: spend every last dime of cash you have first before you even touch stafford unsubsidized or any other loan (except for stafford subsidized, you got nothing to lose with that while you are in school).
Title: Re: Unsubsidized Stafford Loan - pay interest while in school?
Post by: Uptown *2*L on June 12, 2007, 06:22:48 PM
new plan: spend every last dime of cash you have first before you even touch stafford unsubsidized or any other loan (except for stafford subsidized, you got nothing to lose with that while you are in school).

This will depend on how well your investments are doing. My portfolio has performed in excess of 14% a year for the past five years. I wish I could borrow MORE money, not less.
Title: Re: Unsubsidized Stafford Loan - pay interest while in school?
Post by: The Poster on June 12, 2007, 06:40:41 PM
new plan: spend every last dime of cash you have first before you even touch stafford unsubsidized or any other loan (except for stafford subsidized, you got nothing to lose with that while you are in school).

This will depend on how well your investments are doing. My portfolio has performed in excess of 14% a year for the past five years. I wish I could borrow MORE money, not less.

nice that you have investments
Title: Re: Unsubsidized Stafford Loan - pay interest while in school?
Post by: Uptown *2*L on June 12, 2007, 06:54:05 PM
If you have enough cash that you plan on burning through it before you take out loans, then you should have investments.

To do otherwise is irresponsibility bordering on stupidity.
Title: Re: Unsubsidized Stafford Loan - pay interest while in school?
Post by: The Poster on June 12, 2007, 06:58:59 PM
If you have enough cash that you plan on burning through it before you take out loans, then you should have investments.

To do otherwise is irresponsibility bordering on stupidity.

i don't have *that* much chash...i'll save the investments for when i have a steady income again.
Title: Re: Unsubsidized Stafford Loan - pay interest while in school?
Post by: Uptown *2*L on June 12, 2007, 07:06:01 PM
If you don't have that much cash, it's probably a bad idea to burn through it.

I'd say this rule would apply if you have less than $5,000 in cash. That's the absolute minimum you should keep around for emergency money. A million things could force you to drop out of law school and give up your loans; you don't want to be caught without ANY safety net -- unless you're lucky enough to have rich parents who can support you in the meantime.

I'll stand by my earlier post, though: above about $5,000, you should definitely have some sort of investment account. Even just index and bond funds, that should definitely not be sitting in cash. The rest should go to ING Direct or something similar -- might as well earn the 5%. The real cost to you is the difference between the SL interest and the 5% you're earning in high-yield savings. That's only 1-3% (subsidized stafford = 6.8%; Grad PLUS = ~7.25% after discounts) -- which is WELL WORTH the added safety net you're getting.
Title: Re: Unsubsidized Stafford Loan - pay interest while in school?
Post by: naturallybeyoutiful on June 26, 2007, 12:12:51 PM
tag
Title: Re: Unsubsidized Stafford Loan - pay interest while in school?
Post by: Big Slick on June 26, 2007, 06:59:17 PM
If you don't have that much cash, it's probably a bad idea to burn through it.

I'd say this rule would apply if you have less than $5,000 in cash. That's the absolute minimum you should keep around for emergency money. A million things could force you to drop out of law school and give up your loans; you don't want to be caught without ANY safety net -- unless you're lucky enough to have rich parents who can support you in the meantime.

I'll stand by my earlier post, though: above about $5,000, you should definitely have some sort of investment account. Even just index and bond funds, that should definitely not be sitting in cash. The rest should go to ING Direct or something similar -- might as well earn the 5%. The real cost to you is the difference between the SL interest and the 5% you're earning in high-yield savings. That's only 1-3% (subsidized stafford = 6.8%; Grad PLUS = ~7.25% after discounts) -- which is WELL WORTH the added safety net you're getting.

THIS IS ABSOLUTELY INCORRECT if you have any debt (Credit card, Car, and etc) that charges you relatively high interest, say 8% or higher.  It absolutely does not make sense to keep $5000 as emergency cash (or cash equivalent like Money market) while paying 13 or 14% interest on credit card.

smart thing to do is to use whatever cash you have to pay down high interest loans.  When emergency comes, draw from the credit account then because there is a good chance nothing catastrophic will happen to you.

Even though I have enough cash to pay for law school out of pocket, I am still opting for unsubsidized loan because I rather borrow at 6.8% and deduct interest expense on my tax return while my cash generates return in financial market.

If I had any debt that charges me anything above 7% APR that is non-deductible for tax purpose, I would pay that off first.  Guaranteed 7% rate of return is better than 12% possible return in my book. 

Does anybody know if balance transfer option from credit card could be applied to student loan balance? I can transfer balance at 2.9% fixed for the life of the loan but I dont have anywhere to transfer to since I have no credit card debt.

it would be pretty sweet to get unsubsidized loan and pay that off with credit card at 2.9% fixed APR for the life of the balance
Title: Re: Unsubsidized Stafford Loan - pay interest while in school?
Post by: SanchoPanzo on July 14, 2007, 06:54:03 PM
qmmm is correct. For example, my lender allowed sends me a notice (not really a bill) showing the accrued interest every 3 months even though I opted NOT to pay interest while in school. I can pay it or choose not to. Essentially, any payments I make while in law school is put towards any interest I've accrued. However, I don't have to send them a dime since I opted not to pay interests.

of course, i can't say this is the same with ALL lenders. My lender is MEFA.

I could be wrong, but you're also not losing anything by saying yes to paying interest payments while in school. It gives you the option to, but you are not under obligation to do so. So if you change your mind and don't pay or don't pay for a particular month, it has no effect on you than if you had said no from the get-go.

I'm not sure that you can claim that you are 'not under obligation' to make the interest payments.  I suspect that this is strongly dependent on the particular lender and you may be obligated to pay or suffer some sort of penalty.  I further suspect that for private loans, especially those that tie your interest rate into your repayment plan, you would be obligated to pay on time.

Besides, if you say that you won't be making interest payments while in school, you certainly are 'not under obligation' to pay.  However, the lender will always accept payment.  In fact, most loan agreements that I have investigated contain a clause that if you return part of a loan payout within 120 days from the time of issuance, it will be as if you had never taken out the money in the first place.  That is effectively a 4 month interest free loan for the portion returned.
Title: Re: Unsubsidized Stafford Loan - pay interest while in school?
Post by: vap on July 14, 2007, 07:56:59 PM
THIS IS ABSOLUTELY INCORRECT if you have any debt (Credit card, Car, and etc) that charges you relatively high interest, say 8% or higher.  It absolutely does not make sense to keep $5000 as emergency cash (or cash equivalent like Money market) while paying 13 or 14% interest on credit card.

smart thing to do is to use whatever cash you have to pay down high interest loans.  When emergency comes, draw from the credit account then because there is a good chance nothing catastrophic will happen to you.

Even though I have enough cash to pay for law school out of pocket, I am still opting for unsubsidized loan because I rather borrow at 6.8% and deduct interest expense on my tax return while my cash generates return in financial market.

If I had any debt that charges me anything above 7% APR that is non-deductible for tax purpose, I would pay that off first.  Guaranteed 7% rate of return is better than 12% possible return in my book. 

Does anybody know if balance transfer option from credit card could be applied to student loan balance? I can transfer balance at 2.9% fixed for the life of the loan but I dont have anywhere to transfer to since I have no credit card debt.

it would be pretty sweet to get unsubsidized loan and pay that off with credit card at 2.9% fixed APR for the life of the balance

I'm now thinking I did the wrong thing by rejecting unsubsidized Stafford loans.  Would you mind running through some numbers that show what effective interest rate you'll be paying on the unsubsidized loans?  I'm no math whiz, but if my numbers are correct, you really only have to hit a 5% return to break even.  Are there origination fees?

Is this accurate, assuming your effective tax rate is 30%?
$12,000 * 0.68 = $816 interest.
$816 * .70 = $571 interest payment minus tax savings.
$571 / $12,000 = 4.76%