We often times hear from new grads who are astonished by how much student debt they have to “deal with”. One of the reasons they are shocked is that they get caught off guard when they look at their total balance once they graduate. We also hear from many grads who have been repaying their student loans for a year and then find out that the total amount they owe is actually increasing. The reason for both these situations is caused by interest deferment.
This article discusses how to calculate the amount of interest you are deferring each month and the three primary periods during which you defer interest: in school, during your grace period, and in repayment.
Calculating Interest Deferment
The key to understanding interest deferment is calculating the interest charge on your student loans.
To calculate the interest charge, you simply take the amount you borrowed on the date of disbursement less any money you refunded, if applicable. You then multiply that net amount by the interest rate on your loans.
Then take the above number and divide it by twelve. The result is your monthly interest charge.
For those that have built their FitBUX Profile go to the tool titled “Student Loan Pay Down Analysis”. You can take the weighted interest rate at the bottom of the first screen and multiply it by your loan balance. That is the estimated annual interest charge. Divide that by 12 for your monthly estimated interest charge.
Interest Deferment While In-School
While you are in school and considered a student, your loan servicer places you on “in school” status by default. This means you defer 100% of the interest on unsubsidized loans if you do not make any payments. This of course also means that if you aren’t making payments while in school, the amount you owe keeps increasing.
Interest Deferment During Your Grace Period
You are given a six-month period post-graduation called your grace period whereby you don’t have to make payments. While this can be helpful, you are also deferring interest on your loans during that period and so your loan balance will keep on increasing.
We highly recommend reading this article to start developing your strategy during your grace period so you don’t cost yourself money in the long run by simply “kicking the can down the road” by only looking at how much you owe when you have to start repaying, i.e. at the end of your grace period.
Interest Deferment In Repayment
One of the biggest errors made is by those on IDR (income-driven repayment) plans. Many borrowers think that their required monthly payment will reduce how much they owe on these plans.
That is not correct.
If your required payment on your IDR plan is less than the interest charge on your loans, then the difference is added onto the loan balance (on REPAYE half the difference is added to what you owe). Initially, some of the recent graduates we talk to disregard this because, in their mind, this doesn’t really matter since what they owe will be forgiven at the end of their IDR plan. This is a costly mistake.
The amount forgiven is treated as taxable income so the more that is forgiven, the more you will owe in taxes…if your balance keeps increasing over time, then you will owe (a lot) more in taxes.
If you need help figuring out how much interest you will defer or if you are on an income-driven repayment and want help, then check out our income driven repayment calculator.
In addition, our FREE student loan planners have helped thousands of Young Professionals manage and eliminate over $950 million in student loans. We help you develop your plan for free because planning your financial future should not cost you your financial future.
Other Student Loan Resources
- Public Service Loan Forgiveness Guide
- PAYE vs REPAYE
- Finding A Student Loan Planner
- Refinancing Student Loans
- The 7 Best Student Loan Refinance Lenders
About FitBUX, Inc.
If you are interested in developing a student loan repayment plan that is customized to you, you can visit www.fitbux.com and become a member today for free.