Part One
1. Stafford Loans: These are the most common type of loans, and basically anyone who applies is qualified. You're required to be a US Citizen, and cannot have any outstanding loans from the government. This loan has two categories: Subsidized (gov. will pay the interest while you're still in school, interest rate will also be a little lower) and unsubsized (you have to pay for the interest while in school, or you can deffer them until you graduate. There are several repayment plans once you begin to pay them off).
- The current interest rates for Fed. Stafford loans are 4.66% for undergraduates, and 6.21% for graduated students.
- Subsidized and unsubsized loans have the same interest rate, but subsized loans technically have a 0% interest rate while you're in school, making them cheaper overall.
- These loans are compounded monthly, after the grace period following graduation.
2. PLUS Loans: These are for parents to pay for their child's education. These loans usually have a low fixed interest rate. Enrolling in an automatic payment plan grants a discount on the interest rate. The borrower can also deduct the loan from their taxable income, giving them a nice tax break.
- Interest rates for PLUS Loans are 7.21% until July 2015. It's a fixed rate.
- This loan is compounded monthly.
3. Perkins Loans: This is another federal student loan. It's similar to a PLUS loan, except that it's coming directly from the school. There are 1800 schools that use this method, and you must be attending one of them to qualify. This is geared towards those that are in serious financial need. This loan is a bit more selective about who qualifies due to its partnership with FAFSA. Naturally, the government makes the final decision here.
- Interest rates for a Perkins Loan is 5.% for the duration of the 10-year payment period.
- The Perkins Loan has a nine-month grace period. The payee starts paying in the tenth month, falls below part-time status, or drops out of school.
- The compounding period for this specific loan is monthly.
Part Two
Assuming I take out $20,000 in loans over the course of 4 years, the most obvious option would be to take out a Stafford Subsidized loan. This option has a fairly low interest rate at 4.66%, and I won't have to worry about paying it off until six months after I graduate.
Initial Loan Balance:$5,000.00
Loan Interest Rate:4.66%
Loan Term:4 years
Minimum Payment:$50.00
Deferment (Months):6
Capitalization Frequency:Monthly
After the deferment period of 6 months, the new loan balance is $5,117.64 , including an additional $117.64.
There will have to be 48 payments of $114.38 , for a total payment of $5,490.24 (including a total of $490.24 in interest) plus an additional $116.50 in interest paid during the deferment period.
With the interest capitalization there are 48 payments of $117.07 , for a total payment of $5,619.36 (including a total of $501.72 in interest plus $117.64 in interest accrued during the deferment period).
So the total amount paid with interest capitalization is $5,619.36 , or $12.62 more than would have been paid without capitalization.
Sources
http://www.debt.org/students/types-of-loans/ studentaid.ed.gov
http://www.wiu.edu/vpas/business_services/loancalc.php
1. Stafford Loans: These are the most common type of loans, and basically anyone who applies is qualified. You're required to be a US Citizen, and cannot have any outstanding loans from the government. This loan has two categories: Subsidized (gov. will pay the interest while you're still in school, interest rate will also be a little lower) and unsubsized (you have to pay for the interest while in school, or you can deffer them until you graduate. There are several repayment plans once you begin to pay them off).
- The current interest rates for Fed. Stafford loans are 4.66% for undergraduates, and 6.21% for graduated students.
- Subsidized and unsubsized loans have the same interest rate, but subsized loans technically have a 0% interest rate while you're in school, making them cheaper overall.
- These loans are compounded monthly, after the grace period following graduation.
2. PLUS Loans: These are for parents to pay for their child's education. These loans usually have a low fixed interest rate. Enrolling in an automatic payment plan grants a discount on the interest rate. The borrower can also deduct the loan from their taxable income, giving them a nice tax break.
- Interest rates for PLUS Loans are 7.21% until July 2015. It's a fixed rate.
- This loan is compounded monthly.
3. Perkins Loans: This is another federal student loan. It's similar to a PLUS loan, except that it's coming directly from the school. There are 1800 schools that use this method, and you must be attending one of them to qualify. This is geared towards those that are in serious financial need. This loan is a bit more selective about who qualifies due to its partnership with FAFSA. Naturally, the government makes the final decision here.
- Interest rates for a Perkins Loan is 5.% for the duration of the 10-year payment period.
- The Perkins Loan has a nine-month grace period. The payee starts paying in the tenth month, falls below part-time status, or drops out of school.
- The compounding period for this specific loan is monthly.
Part Two
Assuming I take out $20,000 in loans over the course of 4 years, the most obvious option would be to take out a Stafford Subsidized loan. This option has a fairly low interest rate at 4.66%, and I won't have to worry about paying it off until six months after I graduate.
Initial Loan Balance:$5,000.00
Loan Interest Rate:4.66%
Loan Term:4 years
Minimum Payment:$50.00
Deferment (Months):6
Capitalization Frequency:Monthly
After the deferment period of 6 months, the new loan balance is $5,117.64 , including an additional $117.64.
There will have to be 48 payments of $114.38 , for a total payment of $5,490.24 (including a total of $490.24 in interest) plus an additional $116.50 in interest paid during the deferment period.
With the interest capitalization there are 48 payments of $117.07 , for a total payment of $5,619.36 (including a total of $501.72 in interest plus $117.64 in interest accrued during the deferment period).
So the total amount paid with interest capitalization is $5,619.36 , or $12.62 more than would have been paid without capitalization.
Sources
http://www.debt.org/students/types-of-loans/ studentaid.ed.gov
http://www.wiu.edu/vpas/business_services/loancalc.php