How often does interest compound on federal loans? Forum

[XxSpyKEx]

As the topic says, how often does interest compound on the subsidized and unsubsidized portions of the Stafford loan? Also how often does interest compound for the GradPLUS loans? In other words does APR=EAR (APY) or is EAR>APR, and if so, what is the EAR?

[justingeist]

[XxSpyKEx]

From the point you take a Stafford, your loan is in "in-school" status as long as you are continuously enrolled at least half-time. Continuous means gaps in enrollment cannot exceed 6 months. Once you separate from school (graduate, withdraw, or otherwise drop to less than half-time enrollment), you have a six-month grace period during before entering repayment.

For the Subsidized Stafford (hereafter "Sub") loan, the fed gov't pays your interest for you during the in-school and grace periods. For the Unsubsidized Stafford ("Unsub") loan, you are responsible for the interest during these periods, but it does not compound on a regular basis. But any unpaid accrued interest on the Unsub loan is capitalized (added to the principal balance) when you enter repayment.

The gov't also pays your Sub interest during a "deferment" (formal request to postpone repayment after your grace period ends), but not on "forbearance" (similar to deferment, but considered a "discretionary" option. So what happens to Unsub interest on deferment/forbearance and Sub interest on forbearance? It capitalizes at the ends of these periods.

Be aware if you have back-to-back deferments or forbearances: You lender is within their rights to capitalize interest at the end of each period, but in practice some servicers don't; rather they wait until the end of the last of the consecutive periods (lucky break for some but not all due to technical limitations of their systems).

GradPLUS basically works like an Unsub loan. You are responsible for all interest accrual. But there is no grace period, just deferments and forbearances. So again, be aware of the back-to-back business.

So good news if you thought there was automatic annual or quarterly compounding. Bad news for people with private education loans, you may be subject to quarterly capitalization. Hey, there's a good reason to opt for GradPLUS over private loans even if the interest rates are roughly the same.

You completely missed what I was asking.. I already know all of this.. After graduation, how often does interest compound?.. I know payments are made monthly, but is interest compounded every month?.. If it is a 8.5% APR would lead to a 8.83% EAR/APY (which more accurately reflects the effects interest compounding 12 times a year). On the other hand, if interest compounds one time a year, than APR=EAR. Doesn't sound like a big difference, but consider a $170K debt balance on a loan coming out of college (assuming it was all at 8.5% for simplicity sake).

170,000*.085= $14,450 interest accrual for one year
170,000*.0883= 15,011 interest accrual for one year
So additional $561 a year I'd be paying for monthly compounding interest. Therefore, I would really like to know is how often does interest compound?

[hbb]

You completely missed what I was asking.. I already know all of this.. After graduation, how often does interest compound?.. I know payments are made monthly, but is interest compounded every month?..

Having just completed the Stafford loan exit counseling paperwork for my undergraduate loans, I can tell you that capitalization on Stafford loans can occur no more frequently than quarterly*. I'm afraid I can't provide any information about GradPLUS at the moment, but I am looking into capitalization schedules as I work to finalize my financial aid package for the fall.

This is a great question - capitalization schedules are likely to have a pretty significant impact on your total cost. T.H.E. is the only lender I've run across that has been forthcoming with information about capitalization. Bank of America has told me this information is unavailable, which is a bit alarming.


*but not during periods of grace/deferment/forbearance - capitalization can only occur at the end of these periods. T.H.E. is interesting because they claim not to capitalize until a borrower has entered repayment: a lender could capitalize interest when you've graduated, as the in-school deferment period has ended, and again after the grace period has concluded - timing the capitalization, of course, to avoid exceeding the quarterly capitalization limitation. Most lenders will capitalize when you've entered the grace period, which increases costs.


edit: poor cut and paste job. fixed

edit 2: Opps - sorry, you are asking a totally different question. I simply assumed you were asking about capitalization, when you are clearly asking about compounding. Stafford loans are simple interest, not compound.

[XxSpyKEx]

edit 2: Opps - sorry, you are asking a totally different question. I simply assumed you were asking about capitalization, when you are clearly asking about compounding. Stafford loans are simple interest, not compound.

Wow, thats really nice.. A massive savings in interest. Does the GradPLUS loan also use simple interest?

[hbb]

Yep...

[XxSpyKEx]

Nevermind my previous post.. I guess the Stafford loan does compound after capitalization (any between at graduation to after grace period in some cases). A quick google search seems to indicate the GradPLUS loan works in the same way with interest compounding after capitalization (at graduation).

[justingeist]

[MakAttack]

I have a stafford loan (I think that's what it was) from undergrad, and when I asked them about the interest when I go back to law school, I was told that the interest was compounded daily. Not sure if it's the same, but this is what they told me.

[mkressgold]

I have been told in writing by the Federal Stafford Plus loan's lender, Great Lakes and several sources, found using the Google search engine, that this Federal Loan compounds daily and at a fixed 8.5% loan rate, set by the federal government.

Apparently daily compounding is from any lender; if it is a Federal Parent plus Stafford/SallieMae loan the rules are fixed.

Add on the origination fees, the 8.5% loan rate and the ten year repayment schedule, my $8000 dollar loan will cost me about $12,500 to repay. This is more than a 50% loan rate.

I am wondering how this is a program designed help parents have their children attend school. The compounding Dailey factor is not easily found and would certainly be a deterrent to my decision to have selected it.

The government is helping me how?