What Happens When You Can't Pay Student Loans?

[iamdanthemanstan]

Can anybody tell me what exactly happens when you can't pay your student loans. I don't mean permanently, but for a period of time. For example let's say you finish an MA with 50,000 in debt at 7% interest. Then you start a PhD program that while funded leaves you with no money to pay your existing debt. Does the interest compound yearly so after one year you'd owe 53,500 (in two 57,245) or is it more often than that? Are there other fees? Anything else I'm not thinking of? Thanks.

[queenleblanc]

If you are talking about federal student loans, the interest compounds daily. If you enroll in the PhD program within six months of graduating from the MA, your MA loans stay in deferment. If you can at least pay an interest-only payment on the MA loans while they are deferred during your PhD years, you will save thousands in interest down the road.

[iamdanthemanstan]

Thanks. I am talking about the federal loans. So if the interest compounds daily and they say the loan is 7% what would 50000 grow to in a year?

[queenleblanc]

According to this loan capitalization calculator for student loans, if you make no payments and allow the building interest to capitalize (full deferment)- after 12 months the balance will be 53507.99; ten year repayment puts the total at $73892 total by the end of repayment. If you at least pay some interest each month, it looks like only 3400 in interest must be paid, for a total of $69048 total by the end of repayment. So if you can afford to pay some interest while the loan is deferred, you could save up to 4k for each 50k borrowed.

Here is a good online calculator to see what the loan capitalization will be at they'd of your time in school. There are other loan calculators on this site if you want to get on estimate on how much your repayment will be for however much you need to borrow.

http://www.finaid.org/calculators/scripts/interestcap.cgi

[TakeruK]

Thanks. I am talking about the federal loans. So if the interest compounds daily and they say the loan is 7% what would 50000 grow to in a year?

 

For small amounts of time, (a few years or less), interest compounding (even daily) is almost the same as annually compounded interest. Anyways, this is how you could compute interests:

 

In my equations,

R = annual interest rate, for example, 7% = 0.07

N = number of years 

Principal = initial loan amount

Value = final loan amount after N years, including interest -- assuming you don't pay off any of it during this time.

 

For annually compounded interest

Value = Principal * (1+R)^N

e.g Value = 50,000*(1+0.07)^1 = 53,500 after 1 year at simple interest of 7%.

 

For daily compounded interest

Value = Principal * (1 + R/365)^(N*365)

e.g. Value = 50,000*(1+ 0.00019178082)^(365) = 53,625 after 1 year of daily compounded interest at 7% annual interest.

You can also use an online calculator like this one: http://dailycalculators.com/compound-interest-calculator (this calculator only tells you the interest amount, and it is geared for investment instead of loan, but interest is interest and they're computed the same way)

Edited April 21, 2013 by TakeruK

[archphd]

Note that if you have subsidized federal loans, the interest does not accumulate until after your period of deferment-- this means if you are enrolled in a program, you don't get any interest added onto the loan until after you graduate. An unsubsidized loan gets interest tacked on even if you are in school.