Tag Archives: Loans

1:15PM

Today two of our peer financial assistants will be talking about student loans in Peter Hardy’s first year seminar class at 1:15PM. This should offer a great opportunity to spread the word about our program among freshmen on campus and hopefully spur a good conversation among them!

The BIG Question

How Much Should I Borrow?

What is the appropriate amount of debt to take on for my education? In our economic climate, this is a question that gets asked considerably more often than it did before the Great Recession. It used to be that students would take out gobs and gobs of money with the full confidence that with our economy growing they would land a job that pays well and the loans would be a non-issue. Not so anymore. Financial planning is essential and student loan debt should be a calculated peice of those plans. To answer the question of how much to borrow, consider several factors:

What is my major? How much can i expect to earn in my first year of work after graduation?

The rule of thumb is based on your major; depending on what you are in school for you should be able to figure out the answer to the second question of what you can safely estimate your first year’s salary will be out of college. Based on that figure, you can form an answer to the question of how much to borrow. Generally speaking, Liberal Arts majors should try to avoid borrowing more than $27,000- $35,000 and Math/Science types or Computer Programmers can plan to borrow near double that. Mark Kantrowitz, who runs FinAid.org (a great resource for student loan and indebtedness information) says that if you’re borrowing more than $10,000 a year you need to cut down on loans or, if that’s not possible, transfer to a cheaper institution.

Student Loan Education (communications)

Student Loan Education

On subsidized Stafford Loans, the federal government pays the interest while the student is still in school. On unsubsidized Stafford Loans, the student is responsible for interest while he/she is still in school.

Students may choose to defer paying interest on unsubsidized loans by capitalizing that interest. However students should be very familiar with the process of capitalizing interest and what the implications of their decision to capitalize may be.

What does it mean to capitalize interest?

Capitalizing interest is the process of skipping your interest charges and adding them to your existing principle, or loan amount. As the lender adds the interest charges to your principle, your principle grows. As your principle increases, so does the amount of interest you must pay in the future. While your interest rate remains the same, the amount you pay interest on increases. Just because it gives you a chance to defer payment for a while doesn’t make it a good idea…it is not a free extension on your loans. DON’T CAPITALIZE YOUR INTEREST.

When Does Capitalization Occur?

Capitalization occurs when repayment of the principle loan amount begins. Because any capitalized interest is added to the principle loan amount, your interest payments will remain fixed until repayment of the principle begins, at which time your interest payments will be recalculated to reflect the larger principle amount (principle+capitalized interest)

Example of two students:

Jim and Kim both have $4,000 in unsubsidized Stafford loans at 6.8% interest and have opted for a standard (10 year, fixed monthly payments of at least $50) repayment plan. Both attended school for four years and had a six-month grace period on their loans (54 month deferment period). Jim paid the interest – totaling $1,300 – while he was still in school. Kim made no payments, so the total accrued interest of $1,225 was capitalized at the time repayment began. By avoiding capitalization, Jim saved $690.40 on the total amount of his repayment—enough money to cover a month’s rent or a car payment and a month of auto insurance- that additional $690.40 translates into an extra $0.17 for every dollar borrowed.

How can I calculate the difference in what I owe with and without capitalizing my interest?

There is an easy to use online calculator at finaid.org which can help you to establish the financial implications of capitalizing your particular loans.

Interest Capitalization Calculator- http://www.finaid.org/calculators/interestcap.phtml