By Joseph Reinke, CFA, CEO of FitBUX
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 did not account for the accrued interest on their student loans while they were in school and then 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 deferred student loan interest.
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 Deferred Student Loan Interest
The key to understanding deferred student loan interest 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.
You then take the number and divide it by twelve. The result is your monthly interest charge.
Deferred Student Loan Interest 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.
Deferred Student Loan Interest While In 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.
Deferred Student Loan Interest While In Repayment
This is one of the biggest errors made is by those on I.D.R (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, build your profile at FitBUX.com and schedule your free call with a FitBUX Coach to customize your solution.
About FitBUX, Inc.
If you need help making sure your student loan payments are done correctly, then be sure to check out the FitBUX Student Loan Tracking Solution
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.