Unsubsidized Loans
Dear Betsy,
My daughter has an unsubsidized student loan in her name. Would it be better for me to pay her interest for her while she is in college, or should I let it accrue and be added to her principal? She will be a second-year sophomore and also has subsidized loans.
Thank you,
Susan
Dear Susan,
This is an easy one—you should pay the interest. It will save her quite a bit in the long run. If the interest accrues and then capitalizes, she will wind up accruing interest on the interest.
Here’s an example: Under a standard, 10-year repayment schedule, a $6,000 loan will require a payment of about $70 a month if the interest is paid during the 4 years while the student is in school. If the interest is not paid, the balance will keep increasing, so, after the 4 years, approximately $1,600 will be added to the principal in the form of capitalization. This would make the required payment about $90 each month for 10 years—meaning the borrower would have to pay back an extra $2,200 (the $1,600 in interest that accrued over the first 4 years plus about $600 more that would accrue on the higher balance throughout the 10 years of repayment).
If you want to experiment with the numbers and plug in the figures for your daughter’s loans, American Student Assistance® (ASA) offers online loan calculators in the “ASA Toolbox” section at www.amsa.com/bor.
Regards,
Betsy
