Sunday, March 17, 2019

My Federal Loans

To attend Rochester Institute of Technology as a graduate student for a two-year (four-semester) Master's program, I am using Direct Unsubsidized Federal Stafford Loans in four installments from the U.S. Department of Education. Here, I attempt to deconstruct my loan and interest rates in order to visualize it from a day-to-day perspective.

There are a couple conditions this type of federal loan (If there are any errors, feel free to point them out!):
  • The annual and aggregate limit for unsubsidized loans for graduate students is $20,500.
  • During your time of enrollment, you are in a period of deferment, which is when you are not expected to be making payments on your principal, but interest still accrues.
  • The interest accrual is calculated by a simple daily interest formula: Interest Amount = (Outstanding Principal Balance x Interest Rate Factor) x Number of Days Since Last Payment
    • For example, this calculation is, based on my first semester's federal loan disbursement, ($10,141)(6.6% APR)(1) = about $669.306 per year, or $1.8337 per day.
    • Then following the federal loan disbursement of another $10,141 for my second semester, my new total principal becomes $20,282. Then using the same calculation, my interest begins to accrue at about $3.667 per day.
    • And so forth, for the third and fourth semesters, assuming the APR remains 6.6%.
  • The good thing about this loan is that your interest only gets tacked on to your principal after you finish school. This is called capitalization, which is when your unpaid interest gets added to your outstanding principal, thus increasing the interest because it is calculated based on that higher total. This means that the consequence of not making interest payments only kicks in once I begin repayment after the end of the 6-month grace period. In other words, unpaid interest is capitalized following the grace period on my unsubsidized loan.

One possible loan repayment scenario

I made myself a handy visualization of one repayment scenario (which is still more aggressive than the federal Standard Repayment Plan, but not as aggressive as I hope to be) to better understand my federal loans that takes into consideration the following:
  • I am assuming that the total principal balance of my federal loans are or will be $10,141 on 8/17/2018; $20,282 on 1/4/2019; $30,423 on 8/17/2019; and $40,564 on 1/4/2020.
    • My interest accrual in those date ranges will respectively be about $1.8337 per day, $3.6674 per day, $5.5011 per day, and $7.3349 per day.
  • I plan to defer payment on interest until the day after my commencement on 5/10/2020 (even though I have a six-month period before my unpaid interest is capitalized), which should be about a lump sum of $2,790.914). 
  • Once gainfully employed (ideally) at a salary of at least my internship rate of $54k at a job with two weeks of unpaid vacation time and 250 work days per year, I expect that I will be committing at least 8.5% of my income (because I anticipate working in a high COL area), or about $18.45 per day ($550-$560 per month), to my federal loans for an expected complete repayment by 1/14/2028. And of course, this also assumes that I join the workforce immediately after graduation.

The most jarring statistic from my calculations with this one repayment scenario suggests that I will have spent about $14k just on interest by the end of repayment. This might urge me to begin making payments on my principal balance as soon as I can or to re-finance my student loans, depending on my personal situation.

Still, overall, I think this is a positive scenario that makes a lot of assumptions about my professional future, and there are no guarantees that my loan repayment plan will look like this. But it was just a helpful exercise to better understand my financial obligations. And there's reason to believe that being in student debt is far from a unique situation.

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