Minimizing Student Loan Total

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Post Reply
Topic Author
Investing_Newbie
Posts: 20
Joined: Mon May 28, 2012 8:27 pm

Minimizing Student Loan Total

Post by Investing_Newbie »

Hi! So I am currently a college student who has about $5500 in Direct subsidized student loans and will be incurring $5500 more subsidized student loans this upcoming school year, as well as $7000 in unsubsidized loans + whatever extra funds are associated with it. I already have a set plan to pay off the $11000 in subsidized loans during the 6-month grace period so that I avoid accruing any interest on these. As for the $7000 unsubsidized loan, it will be disbursed in two payments of $3500. I've been able to learn so far that interest accrues on the disbursements daily. I also know you can pay on interest accrued at any time. However, what confuses me is how the total balance owed (principal+interest) is affected by paying interest off while still in school. How would I be able to minimize the total balance owed by making interest payments in school, and what would it be? Or, in other words, how could I minimize the interest accrued? Another related question is does interest accrue on the unsubsidized loan until the entire balance is paid off? The loan interest rate is 4.29%.
"An investment in knowledge pays the best interest."-Benjamin Franklin
User avatar
market timer
Posts: 6535
Joined: Tue Aug 21, 2007 1:42 am

Re: Minimizing Student Loan Total

Post by market timer »

Generally, you shouldn't make payments toward student loan interest while in school. Interest on federal student loans does not compound (i.e., interest only accrues on principal, not on interest), so when you make payments toward loan interest, you're effectively paying off a 0% interest loan. Yes, interest continues accruing until the principal is paid off.
nanoanalyzer
Posts: 454
Joined: Sun Sep 28, 2014 4:14 pm

Re: Minimizing Student Loan Total

Post by nanoanalyzer »

The interest on unsubsidized loans will capitalize after the grace period, so at the very least, pay all the interest before that happens. At that point, interest will begin to accrue on the interest and your total loan cost will increase at a faster rate.

There are also certain tax situations where it can be advantageous to pay off $2500 of deferred interest per year, regardless of timing of capitalization. If you graduate into a high-paying career, or have a high-earning spouse, you may not be able to deduct student loan interest later on.

I think you're just confused about the difference between:
Subsidized (government pays your interest, or really, just doesn't charge it) and
Deferred (payments are not due and accrued interest does not capitalize)

The best way to "minimize" the total cost of the loan is to not take it out in the first place. Second best is to pay it off as quickly as possible.
"If you think stocks are like physics, you believe there must be smart people who can measure exactly where the Dow Jones Industrial Average will be in five months." -Morgan Housel
Post Reply