Stupid loan question

[futurelcsw]

I have never used FAFSA/ federal loans until this year so forgive my ignorance...

I know that pretty much everyone is eligible to receive up to $20,500 in Federal Stafford unsubsidized loans each year for grad school. I am attending a Masters program at a public school in California so tuition is relatively inexpensive but it will obviously continue to go up.

So say I need around $20,000 for both years of tuition and books, (I plan on paying living expenses out of pocket because my boyfriend works and I will try to work part time) should I take out the $20,000 the first year, or should I only take out what I need this year? Is there an advantage to taking out only what I need now for accruing interest reasons? Can I take out more if I only take out $10,000 initially?

Thanks in advance for the help.

[jeffster]

You would probably be best off meeting with a financial aid adviser at your school. This is the sort of thing they're paid to help with!

In addition to advice, they might be able to help you find other sources of funding besides loans, or additional loans if the federal ones aren't enough.

[lydibird]

First off, I second Jeffster about talking to a financial aid adviser. They really know their stuff and will know your situation and options better than anyone on an internet forum.

That said, I would go year by year. Since grad students are only eligible for unsubsidized loans, you are responsible for the interested collecting on your loans as soon as you are given the money. So in your example if you borrow $20,000 your first year you will be responsible for the interest on $20,000 for one year then the interest of $20,000+unpaid 1st year interest. If you split that into two years, you only have to pay interest on $10,000 the first year and then $20,000+unpaid 1st year interest for the second year. So you save by borrowing year by year.

That's more convoluted than I intended. Let's do the math. According to the federal student aid website, the interest rate on Stafford loans for grad students is about 6.8% (but I think it's higher for this coming year).

Borrowing $20,000 the first year (assuming you pay off the accumulated interest every year):

Year One Interest: $20,000*.068 = $1,360

Year Two Interest: $20,000*.068 = $1,360

Total Interest You Pay: $2,720

Borrowing $10,000 each year:

Year One Interest: $10,000*.068 = $680

Year Two Interest: ($10,000+$10,000)*.068 = $1,360

Total Interest: $2,040

So you save $680 dollars borrowing as you need it. If you paid off the interest the first year, that's the only savings to borrowing as you go. If you don't pay off the interest the first year (so now you pay interest on the interest), the difference would be even bigger ($726) AND the difference increases each year you're still paying off the loans.

To me $680 is a large enough amount to deal with the paperwork again, but it may not be for everyone.

Edited June 14, 2012 by lydibird

[futurelcsw]

Thanks to both of you guys. Im going to call the FA office today. I really hope interest doesn't go up, it's already outrageous. I don't want to pay any more than I have to.

[kaguyahime]

I'm sure that your FA office will tell you all of your options, so it is a great idea to go and talk to them.

But just so you know, grad students are certainly not only eligible for unsubsidized loans.

Once your FA office processes your financial aid package for the Fall (which they proabaly have not done yet), depending on the results of your FAFSA, you should be eligibe for subsidized loans, unsubsidized loans and Graduate Plus loans.

That being said, your concern seems to be whether it is possible to get only a part of your loans now, see how things go, and have the option of getting more later.

It is very likely that this will be easy to do, as loans are distributed at the beginning of each quarter or semester.

So you would just accept all of the loans that they offer, and as the new quarter/semester approaches, if you decide that you do not need the additional funds, you can elect to decline one of the loan awards you have already accepted.

[OregonGal]

Actually Kaguyahime, we've had this discussion in other threads on this forum-- The Ed Dept is phasing out subsidized loans for graduate students on July 1, 2012. Starting on that date, they will only be disbursing unsubsidized Stafford Loans at 6.8% interest with a per-year cap of $20,500, and to supplement financial need beyond that will be offering unsubsidized Grad PLUS loans at 7.9% interest and no cap.

[kaguyahime]

Yikes! You're right, OregonGal.

I apologize for posting inaccurate information.

I have obviously not been paying enough attention to these bad developments on the grad school funding front.

[OregonGal]

Well if it makes you feel better... at least we don't have to deal with Sallie Mae since we have access to the Grad PLUS loans! I thought 7.9% was horrible (especially when you can get a car at near 0% and a house at 4-5%) but I talked to a recent MBA graduate yesterday during a financial planning seminar, and he is dealing with undergrad Sallie Mae loans at a whopping 21% interest rate--higher than most credit cards!