||Ask Dr. Don
Student loan repayment
I am a graduate student with $44,000 in student loans. Some loans
are subsidized, with the government paying the interest while I'm
in school, while others are unsubsidized. Since I am a currently
enrolled student, no payments are due at this point. I pay $150
to $200 a month anyway because I don't want to be saddled with too
much debt once I finish school.
Here's my question: Is it better to have my entire
payment go to the unsubsidized portion of my debt or for the payment,
once the interest on the unsubsidized is paid, to be split between
the unsubsidized and subsidized loan amounts?
Interesting question. My recommendation is to put all of the money
toward paying down the unsubsidized loans.
Here's why: Even though no payments are due while
you're in college, interest is accruing on the unsubsidized loans.
In finance terms the loan is capitalizing interest or adding interest
to the outstanding loan balance.
Your approach of making monthly payments on the unsubsidized
loans equal to the monthly interest expense will prevent capitalized
interest from increasing the loan balance. Any additional money
that you put toward the unsubsidized loans pays down the loan balances,
which in turn reduces the next month's interest expense.
Whittling away at the unsubsidized loan balances reduces
future interest expense. Since the government is picking up the
tab on the subsidized loans' interest expense while you're in school,
as well as during deferment or grace periods, you are better off
paying down the loans where interest accrues.
When you pay down principal on either loan you save
the interest expense you would have over the life of the loan. Since
the subsidized loans' interest expense doesn't begin until after
you leave school and the end of the grace period, you get more interest
savings by paying down the unsubsidized loans now.
If you're not already using it, you can access
your student loan data on the National
Student Loan Data System (NSLDS). When you start making payments,
Publication 970 to determine whether you can deduct the interest
paid on your student loan. Finally, check out the benefits of consolidating
your student loans after graduation by using the National
Direct Student Loan Calculators.
-- Posted: Aug. 24, 2001