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

lower mortgage interestpush yourself to save more for retirement10% donate to charitydo you need life insuranceno apologyritual scheduleretirment savingspublic service loan forgiveness programcar leasingPost-DivorceCD'sEasy Life Insurance Prime Rate Rise 2015bad retirement planningInterestcomparison shoppingCiti Simplicity Card mobile appForbes Top 10sidelinedback-to-school budgetretirementdangerous money seasonAdequate Auto and Home Insurancedon't do five year car loanconfidentFRA2015 record year car salesiffy incomebe good exampleUrbana-Champaigndebit cardDeath BenefitcommissionsGay Rightsescrowidentity frauddon't buy wantsallowance taskgay marriage ban end Florida marriage inequalitysecure creditbest interest ratesdon't ignore open enrollmenttelevision hostprotect loved ones Giftssavingshealthy gums40% toward financial goalbalance transfer women outlive menfinancial arguments10 year repayment plan lower overall drug costpaid in fullUniversity of Illinoisfiduciaryno negativityprofessional advisorlive below your meanshome related tax break bonus Student Loanlet them have 50% controlForbesclosing disclosurelearn good financial choicesreduce withholdingcost of capitalization calculatorno fee transfermortgageavoid burn outjanuary billsfraudulent returnstandard deduction manage student loansalternative FICO scoreMoney-Savingno interestcommunity bankmake saving a pleasureshop online guaranteed level term policyJose Rodriguezage appropriate chorereduce interest rateteenshigher insurance deductibleunexpected expense6 month waiting periodFinancial CliffAmy Lacyetincreased auto insurance premiumhome buying mistakesconsider roth 401(k)Free Debt Eliminatorkeep a scheduleengaged in financesresponsibleFinancial Power of Attorneystudent loan debtFinancial Awareness Video Festivalretirement planget health insurance30 year mortgage retain separate credit cardsAccuQuote.comunsubsidized Stafford loanSatisfying15-year refinance dealHeartis it kind?HSA tax savingshealthy aging home buying seasonhealthy retirement weightcar buying mistakesbreakdown projected monthly housing costfederal student loan deferment confident of solutionopen enrollment review 20 to 25 times annual incomeCombo Insurance Productshousing marketsmall changes insuranceHoliday Seasonmonthly benefit 3 savings buckets suitablereal estate mistakes740 credit scoreCOLAloan necessitygift up to 14,000ForeclosureRetirement IncomeHDHP/HSAholiday spendinglong term careno tax on withdrawlsstore credit cardszero rate transfer dealsnew carETF'sderailed planbe kind to yourselfcouple financessame sex marriage band end Floridaemployer offered life insuranceLong Term Care premiumsSuze approvedVital Documentscreate new truthMinor Children AARP Social security calculatorborrow each year, capitalization is going to pile up 50 over 50pay interest while in schoolspeak new goalInfluential CelebrityFICO at least 720accelerate dental workearn more on savingsInflation BenefitPay Off Debt Before Retirementlong term goalreferrals ignore 6 month grace period family save at least $100 monthlyCommunication Skills credit utilization ratesocial securityspecial saving accountsetup automatic savings withdraw4 Must Have Documents standard rateraising interest ratesmarriage financial responsibilitySuze Ormanincrease retirement contribution ratepoint cost offset by savingsrent vs buyemotional stakesoverspend on dining outsuccessbecome member increase retirement savingscnbc alarm clocklower interest rateis it true? Influentialsbad decisionsfocus on needsrising home priceslower rateeliminate credit card debtchildren under 18Veterinary SchoolStudent Debt CrisisBankruptcygift not loanLTCprotect dependent raise deductiblesBaby Boomersdoctor no longer in networkmoney-aware childmortgage interest tax deductionleave a legacySandy Hook Elementary SchoolCredit Card Rate Increaseworst financial mistaketerm insuranceHDHP Federal Stafford loanAARPwrite new goalproperty tax8 Rulesmaintain standard of livingtake actionstrained relationshipNew York Lifevalue moneyLong Term Care shoppingBankplanhome insurancechildren's bookfinancial independencebuying a cardon't spend Legal Guardianstudent loan repayment planEmployer Matched Contributionautomatic withdraw to savings college graduateloan is giftmental healthvalentines dayteens and moneyhealthy retirement blood pressureemergency fund savingsdeath benefit needs for familycan you afford itannual cost of living adjustmentloan big picture replace permanent life insurance with term3 bucket approachdebt free3% debt transferred doctors in networkpeace of mindbill paying prioritiesis it necessaryanticipated salaryone credit cardworkaholic8 month safety netFHA loan feesnear historic lowsPersonal FinanceCollege of Veterinary Medicineprovider of financial supportcut monthly cable billLTCi ASAPorigination feespurely financial standpointget over life insurance phobiano splurge better loan dealsfile asapsavings pleasureonly offered while employed How To Build CreditpositiveMotherSwap Older Annuities or Life Insurance title insuranceGoodbyemortgage brokerrefinance8 month emergency fundonly refinance if it paysCNBCkid borrow firstsocial security never insolventno waiting periodFiscal Responsibilitypublic service career student loan repayment responsible with moneyRevocable Trustat worst still pay 75% benefitallowanceno retirement funds for down paymentbetter termstax ID theft19 years cash flow problemfinancial fearshigh credit score discountpay high rate off firstwomen live longerRevocable Living Trustborrowing plan high down paymentConventional loan PMIstudentFederal PLUS loanteach importance of helping others20% down paymentshort term goal max employee matchreal estate marketFederal Funds Ratedon't blow tax refundlong-term care exercise reguarlydon't cover cosmetic dentistryGiftHDHP'sGracecredit managementMoney Marketnon conventional routeTelepicturestaxeshome buying budgetschedule vacationcontribute household expenses don't defer interest paymentspowerfullife insurancehighest possible benefitdangerous retirement planWarner Bros Television GroupAmericans don't use all paid vacation timecredit unionStock Investmentslow-cost index mutual fundpaid vacationIRA contribution gifted moneydon't derail retirement savingsbuying car 2016Alarm Clockrefundsave moneyclosing costs 2% of loancostly insurance mistakeWilllong-term care premiumssocial security not going brokeFinancial Systemalways use all paid time offcharges on credit cardspring summer ARM Cautionidentity theftfinancial aidno sneaking in feeslowest cost fund option20 year level term NewtownFundsHigh Credit Scoremax benefit covereddental savings plancut monthly cellular billcompare monthly expensestoo expensive schoolage appropriate goalspay off debtphysical healthpay credit debt ASAPinterest capitalizationcar loanPBS SpecialAshley Springerstay positiveraising mortgage rates increase emergency savingsSchool of Social WorkBill and Pennyautomatic paymentSuze is my biggest mentorSpendingno private loansovercome financial fearscredit reportnegotiate points with bank or seller15 year mortgageburn outSelectQuote.comgrandparent IRA contribution 20% equityDurable Power of Attorney for Health Careis it necessary?financing car know before you oweCivil Rightsmax employer matched 401(k) contributionretirement accountsstudent loan repayment estimatorwomen long term careLoveteach your child good money habitsitemized deductionsummer job match income get credit cardhome budget after tax costquick closinginitial tax break Wall Streetdon't use allowance as bribepresident Obamaroth irawives should be involved in retirementinsurance mistakeyours, mine & oursbest loan deal Long Term Care Insurance Phyllis Shelton expert long-term careCPI-WThe Suze Orman Showunder 18 financial giftswitch to spouse coveragelow down paymentMoneymoney vows2015 financial roadmapCommencementrolloverultimate compounding giftraise your deductiblehigh FICO scoreGay Couplesadjust allocations don't extend mortgage Mass MutualLifestylecontribution overspend on nights outbest interest of investorpercentage of women widowed 75-84four steps to retirement savings affordabilityOne Wallet At A Timeeight month living expense healthy youFinancial Awarenesspreexisting condition not coveredcommitHDHP's are good for youhigh premiumsFinancial Educatordream schoolterm life insurancerequired disclosurecollege studentloved ones dependent on incomeLTC shoppingbuy homefull retirement ageExhibitioncredit cardemployer funding HSAmeet monthly Suze Orman Scholarshipadd teenRichnot gender specific Financial Gift Cliffgrandchild summer job IRA contributioncostly legal pay down car loanearn allowancestudent loan repaymenthigher monthly paymentwaive home inspection bid3 step financial road mapHDHP's are not badthree year car loan20% down payment avoid feesgraduationbig results affordable premiumSuze Orman's Money Warslife insurance name trust as beneficiaryUniversity of Floridafinancial goal phraseone annual feemultiple lendersdental insurance do not pay allowance for good behaviorno private loanStudent DebtpremiumPrime Rate Increaseprotect and provide for minor child tax refund fraudRetirement SavingsTeachno late fee face your financial fearFederal Reserveemergency fund community collegeCory Bookerlow credit scoreoverspend on giftssave automate student loan paymentsbetter loan ratesback door Roth IRAreduce monthly paymentdebtlousy investmentbudgetuniversal college accessEric Dodge pay down student loan debtco-sign permanent life insurancesecured cardFinancialverify wellness screening and programsCredit Card Interest Rateno life insurance financially irresponsibledental discount plan401KSuze changed my lifemortgage disclosureloan no longer than 36monthsUS Tax CodeNew american Dream letter to suzeapproved medical 100% tax-freeMortgage Credit Availability Indexschool Invest for savings growthlower premiumARMpay more than minimummonthly dental insurance premiumlow mileage discountEmergency Savingsswitch to roth 401(k)Changing Livesdeath benefit 20 to 25 times annual incomedon't charge a pennyenjoy saving 401(k) Contributionspercentage men widowed 75-84high deductible health care planbe true to yourselfprotect your familyfile taxes quicklyFixed Rate Mortgageshorter payback periodsocial workwomen longer life spanSave Us Moneyhome loan credit score below 740 buy home you can affordSuze Orman spouse Kathy Travishealthy teethbuy down 2017 Taxesfocus on new truth gift grandchild IRA contributionprescription tierpaying for collegerequire chore in exchange for allowanceverify retirement plan with HR or plan sponsorOverspendingFinancial Advice2016 adjust estimated taxHoliday Shoppingjuggle multiple financial goalscalculate dependents annual income needsBeautyWashingtonwould you decline a bonusinsurance yearly reviewdear suzestaycationtraditional vs roth 401(k)adult childrenFinal Goodbye!00% tuition paiddepreciating asset Financial Solutions For YouStaffords this year have a fixed 6.8% interest rateYoung Adult Auto Savings get the most out of social security Sandy Hook Promisehome ownershiprepay student loanssame-sex marriageinterest on student loansMost Influential Celebrities Listnot enough life insuranceHolidaycompare provider pricingraise insurance deductibleincentives for health care wellness screeningMarlo Thomasclosing feesheartacheFICO credit score credit card mortgagestretch out haircut appointmentsfinancial concernpay 100% cashCredit scoreFICO Scorekids schedule paymentsHigh FICO Score = Better RateSelfish2016 adjust withholdingMust Have Documentsadvice for college graduatesRoth 401(k)

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