You borrow $100 from a private student loan lender at a 10% interest rate
After one year, you build up $10 in interest and it’s added to the original balance of $100 (aka capitalized) which means you now owe $110. At the end of year two, your interest is $11 (10% of $110). This is capitalized again and you owe $121. Year three interest is $ and at the end of the year you owe $. Year four interest is $ and at the end of the year you owe $. The $6.41 difference is the cost of having interest capitalized annually vs. at the end of four years. It’s interest charged on the interest. Also, at his point your effective interest rate is still 10% (compared to 7.14% in the first example).
Federal Loans Capitalization
- Repayment begins
- Deferment ends
- Forbearance ends
- Upon default
- Change of repayment plan
- Loan consolidation
Capitalization During Income Based Repayment
Under IBR, if you leave the repayment plan OR you no longer qualify to make payments based on income, the outstanding interest will be capitalized.
The same is true with PAYE, except there is an interest capitalization cap if you no longer qualify to make payments based on income. The maximum interest that will be capitalized if this occurs is 10% of the initial loan balance at the time you entered PAYE.
Private Student Loans Capitalization
Similar to Federal student loans, many private student loans offer delayed capitalization on unpaid interest in certain situations. However, there are many variations and you should never assume your private loan works this way. Private student loans are all are over the place as we mentioned before, there is really no rule of thumb. You must understand how your specific loan works to make the best decisions.
Loan Fees
Some federal and private medical school loans charge loan fees above and beyond interest. The most common fee is the origination fee charged when you take the loan out. It’s best to include any fees and interest when considering the entire lifetime cost of your student loan.
Consolidation Loan Interest Rates
Federal Direct Consolidation loans are designed to payoff multiple underlying federal loans and consolidate them into one new loan. The interest rate is set by taking the weighted average of your underlying rates and rounding up to the nearest 1/8th percent. Keep in mind, student loan consolidation is NOT a way to get lower interest rates. However it can be beneficial if you have older variable rate federal loans that you’d like to change to fixed rate.
What Is Student Loan Consolidation?
Consolidation allows you to combine all your existing qualified federal loans into one new federal loan. The current vehicle available for doing this is the direct consolidation loan. There are pros and cons that you must understand before moving forward with this type change. Use caution once you consolidate, you cannot undo the transaction.
There are also options for consolidating (or refinancing) your existing private and federal student loans into a new private loan, however, most payday short term loan Timpson Texas of these lenders set your new rates and terms based on your financial situation not based on the underlying loans.
Direct Consolidation Eligible Loans
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Subsidized Federal Stafford Loans
How Do You Qualify?
In order to qualify for direct consolidation, you must have at least one Direct or FFEL student loan that is in grace or repayment. For example, you would not be able to refinance a Perkins Loan by itself it would have to be paired with an FFEL or Direct loan.
