Suze Orman TwitterSuze Orman FacebookSuze Orman YouTubeSuze Orman LinkedIn
View Blog & News List

Student Loan Alert: Beware the Cost of Capitalization on Unsubsidized Staffords

September 07, 2015 at 12:00 AM

Attention all college freshman, and returning students! If you have taken out an unsubsidized federal Stafford loan to help pay for college, I am betting you are making a big financial mistake.                                                     

My big question for you: Are you making the interest payments on the loan while you’re in school? 

If you just answered no, that’s the big mistake. And to be honest, it’s an easy one to make. 

The way loan repayments work is that you are not required to pay a dime while you are in school.  But if you go that route, the interest payments you aren’t making are added to your loan balance. This is called interest capitalization. So when you graduate, the amount you owe on the loan—your principal balance—is going to be higher than the original amount you borrowed. 

For example, let’s say you're a college freshman this year and you have a $5,500 unsubsidized Stafford loan. All Staffords this year have a fixed 6.8% interest rate. If you don’t make any interest payments for four years, and then choose a 10 year repayment plan your balance at the start of repayment will be about $7,202 and by the time you make the last payment 10 years down the road, your total loan cost will have been nearly $9,950. If you instead pay the interest while in school, your all-in cost will be about $850 less. And that’s just for freshman year. If you continue to borrow each year, capitalization is going to pile up on you. 

My advice: Do everything you can to pay the interest while you’re in school. On the $5,500 example here, that works out to about $63 a month. I bet you can figure out a way to handle saving about $2 a day. Or if family asks how they can help—suggest they help you avoid capitalization! You can plug in all your loan details into this Cost of Capitalization calculator to see how much you can save by paying interest while you’re in school.

Tag Cloud

University of Illinoisonly offered while employed save moneysave BankLovemonthly dental insurance premiumpay credit debt ASAPMarlo Thomasraise deductibleswives should be involved in retirementdental discount planadd teenlong term careborrow each year, capitalization is going to pile up Gay Rightsback-to-school budgetno negativitystretch out haircut appointmentsInvest for savings growthChanging Livesborrowing plan face your financial fearitemized deductioncouple financescommunity banklive below your meansmonthly benefit Phyllis Shelton expert long-term carealternative FICO scoreproperty taxpreexisting condition not coveredmoney vowsPrime Rate Rise 2015New York Lifeorigination feesAARPUS Tax Codecut monthly cable billincentives for health care wellness screeningspeak new goalreferrals Pay Off Debt Before Retirementpoint cost offset by savingsSandy Hook Elementary SchoolCivil RightsLTCanticipated salaryprotect and provide for minor child Financial Systemstandard deduction pay interest while in school8 month emergency fundloan necessityhigh FICO scoreretirement planemotional stakesis it true? television hostMost Influential Celebrities Listconfident of solutioninterest on student loanspush yourself to save more for retirementstudent loan repayment planFinancial Solutions For YouInterestcar leasingsocial security not going brokeget over life insurance phobiabest loan deal dental insurance ritual scheduleco-sign Prime Rate IncreaseLifestylecan you afford itHoliday Seasonapproved medical 100% tax-freelower premiumsecure creditFinancial Educatorcollege studentlow down paymentfinancial argumentsMoney Marketmobile appcredit managementfile taxes quicklypay off debtstudentSatisfyingcollege graduatecostly insurance mistakecontribution insurancejuggle multiple financial goalsno late fee kids schedule paymentscar loando you need life insuranceretirment savingstaxesCOLAhome budget after tax costUrbana-Champaignannual cost of living adjustmentverify retirement plan with HR or plan sponsorfinancial fearsbad decisionsOne Wallet At A TimeSandy Hook Promisedon't ignore open enrollmentWashingtonletter to suzegrandchild summer job IRA contributionnear historic lowstax ID theftnew caroverspend on giftsfocus on needs401(k) Contributionscost of capitalization calculator4 Must Have Documents AARP Social security calculatorteach importance of helping othersis it kind?buy home you can afford2016 adjust withholdingno tax on withdrawlsETF'ssmall changes death benefit needs for familybill paying prioritiesCiti Simplicity Card retirementkid borrow firsthome insurancelower overall drug costUniversity of FloridaTelepictureshome loan credit score below 740 Bill and Pennyreduce monthly paymentsocial security never insolventLong Term Care shoppingstudent loan repayment estimatorHeartloan is giftWarner Bros Television Grouptake actionnot enough life insuranceMass Mutualpresident Obamafinancial independenceStock Investmentshigh deductible health care planbuy homemoney-aware childincrease emergency savingsmarriage inequalityFinancial Awarenessstay positiveholiday spendinguniversal college access15-year refinance dealback door Roth IRABankruptcyGiftignore 6 month grace period big results powerfulchildren's bookFundsmaintain standard of livingfederal student loan deferment age appropriate choredoctor no longer in network10% donate to charitybe good exampleidentity theftearn allowanceadult childrenlet them have 50% controlFinancial Advice20% down payment avoid feesAmericans don't use all paid vacation timeprotect your familyjanuary billsloan big picture required disclosurekeep a schedulemax benefit coveredLTC shoppingverify wellness screening and programsConventional loan PMIget health insurancelong term goalCory Bookerhealthy retirement blood pressurenegotiate points with bank or sellerstore credit cardssummer job match income waive home inspection bidEasy Life Insurance car buying mistakesHSA tax savingsFICO Scorebe true to yourselfincrease retirement savingsclosing costs 2% of loanresponsiblelife insuranceSuze is my biggest mentormortgage disclosureCollege of Veterinary Medicineexercise reguarlyonly refinance if it payscredit unionJose Rodriguez2015 record year car salesdon't spend allowanceswitch to roth 401(k)don't blow tax refundAlarm Clockdon't cover cosmetic dentistrywomen live longergift up to 14,000Revocable Living Trustcredit cardgift grandchild IRA contributionhome buying budgetloan no longer than 36monthsmortgage brokeremergency fund multiple lendersstandard ratetitle insurancebe kind to yourselfGoodbyeNewtownunsubsidized Stafford loanno waiting periodpositive2017 Taxesavoid burn outsavingspublic service career student loan repayment student loan repaymenthealthy aging student loan debtSuze Orman ScholarshipFiscal Responsibilitybuying a carphysical healthget credit cardcomparison shoppingRichCredit scorecommunity collegelousy investmentCredit Card Interest RateHDHP's are not badhighest possible benefitpublic service loan forgiveness programWall StreetStudent LoanSpendingRetirement SavingsNew american Dream lower mortgage interestRoth 401(k)Save Us MoneySelectQuote.comalways use all paid time offAshley SpringercommitDurable Power of Attorney for Health Careescrowdebt freeallowance taskgay marriage ban end Florida dangerous money seasonAccuQuote.comHDHP'spremiumemployer funding HSAconfidentExhibitionadjust allocations 40% toward financial goalovercome financial fearsGay Coupleshome buying mistakespaid in fullSchool of Social Worksame-sex marriagelong-term care overspend on dining outrollover3 bucket approachwrite new goalcnbc alarm clockHow To Build Creditbuying car 2016Personal Financefinancial concernlower ratequick closingresponsible with moneyyours, mine & oursdoctors in networkAuto Savings paying for collegeterm insuranceSuze Orman spouse Kathy Travisreal estate marketcut monthly cellular billgrandparent IRA contribution purely financial standpointdream schooldon't buy wantsinsurance yearly reviewAmy LacyetLong Term Care premiumsteach your child good money habits20% down paymentgraduationStudent Debt CrisisForeclosurevalentines dayno interestclosing disclosurecharges on credit cardrefundplanCredit Card Rate Increasefocus on new truth Retirement Incomeswitch to spouse coverageStaffords this year have a fixed 6.8% interest ratefile asapwomen longer life spanHDHP percentage men widowed 75-84Long Term Care Insurance children under 18advice for college graduatescalculate dependents annual income needsFRAmortgageidentity fraudemergency fund savingsGracebecome member Post-Divorcefinancing car learn good financial choicesSuze Orman's Money WarsdebtGiftsno sneaking in feesunder 18 financial giftshort term goal low credit scoreCommunication Skills LTCi ASAPhigh premiumsAdequate Auto and Home Insuranceautomatic paymentFinal Goodbyeheartachefull retirement agedeath benefit 20 to 25 times annual incomeone credit cardpermanent life insurancedon't extend mortgage one annual feeclosing feesdon't do five year car loanbetter termsreduce withholdingmake saving a pleasureInfluential CelebrityMortgage Credit Availability Indexmax employee matchdepreciating asset home related tax break bonus do not pay allowance for good behaviorno life insurance financially irresponsiblerent vs buymental healthMotherIRA contribution gifted moneylong-term care premiumsCPI-Wdangerous retirement plancredit report20 year level term provider of financial supportsocial workdon't derail retirement savingsiffy income2015 financial roadmapteens and moneybudgetsidelinedultimate compounding giftbest interest ratesYoung Adult would you decline a bonusrequire chore in exchange for allowanceHoliday Shoppingincrease retirement contribution rateage appropriate goalspay down student loan debtinsurance mistakewomen long term carecompare monthly expenses401K3 savings buckets Emergency Savingstax refund fraudpay more than minimumbad retirement planninglow-cost index mutual fundCommencementget the most out of social security interest capitalizationprotect loved ones FICO credit score credit card mortgageForbes Top 10enjoy saving Suze changed my lifeHDHP's are good for youtraditional vs roth 401(k)savings pleasureno private loanbuy down setup automatic savings withdrawBeautydon't charge a pennypay 100% cashFinancialSuze Ormanno fee transferworst financial mistakedebit cardretirement accountslife insurance name trust as beneficiaryVeterinary Schoolhigher insurance deductibleschool FHA loan feesteenshousing marketmortgage interest tax deductionOverspendingderailed plancreate new truthmanage student loansbreakdown projected monthly housing cost20% equitydon't defer interest paymentsEmployer Matched Contributionmeet monthly don't use allowance as bribelowest cost fund optiongift not loanemployer offered life insurance50 over 50consider roth 401(k)pay high rate off firstunexpected expenseraise insurance deductibleroth iraFinancial Awareness Video Festivalbetter loan ratesFederal Funds Rate2016 adjust estimated taxMoney-SavingStudent Debtprotect dependent repay student loans19 years cash flow problemvalue moneyFree Debt Eliminatoris it necessary?leave a legacywomen outlive menat worst still pay 75% benefitnot gender specific percentage of women widowed 75-84term life insurancefinancial goal phraseEric Dodge contribute household expenses Holidayno retirement funds for down paymentreplace permanent life insurance with term3 step financial road mapFinancial Power of AttorneyCNBCautomatic withdraw to savings The Suze Orman Showfour steps to retirement savings pay down car loanis it necessaryno splurge Suze approvedForbes!00% tuition paidmax employer matched 401(k) contributionautomate student loan paymentsreal estate mistakesbalance transfer 8 Rules3% debt transferred Baby Boomerssuccessloved ones dependent on incomepaid vacationknow before you owefamily save at least $100 monthlyFinancial CliffPBS SpecialHDHP/HSAinitial tax break 6 month waiting periodsecured carddental savings planopen enrollment review overspend on nights outfraudulent returnmarriage financial responsibilityTeachMoneyFinancial Gift Cliffrising home pricessocial security10 year repayment plan Influentialsshop online guaranteed level term policydear suzehealthy retirement weightprescription tierspecial saving accountrefinancethree year car loansame sex marriage band end Floridazero rate transfer dealsretain separate credit cardshome ownership8 month safety netbetter loan dealsreduce interest rateFICO at least 720


View Blog & News List
People First. Then Money. Then Things.
Connect with me on Facebook Connect with me on YouTube Connect with me on Twitter
© 2017 Suze Orman Media Inc. All rights reserved.
 
 |  Search  |  Sitemap  |  Privacy  |  Terms
Sign Up For E-mail Offers
Open Panel
Close Panel