Private institutional loan vs unsubsidized federal loan help

[keeppushing99]

Hey guys!! I’m an incoming MS1 now trying to figure out which loans to take out first. I’m trying to be as informed as possible and would like some opinions from others more versed with med school loans. My school is offering a 10k private loan with a 5% interest rate. The loan’s interest rate starts applying 4 years after I graduate med school so it’s subsidized until then and if I accept a job at the school’s affiliated hospital in the future and tell them I’ve taken loans with them I can get it forgiven I’m assuming after working a certain amount of time. Not sure if I’ll want to do that but it’s a nice option. The private loan has a finance charge of 2,727.86. I’m just not sure if taking that loan would be better than the federal unsubsidized loan which has a loan fee of 430 and has interest applied each year. I need some advice if you all can offer any. Thank you so much!!!


P.s. I currently have 19k in undergrad debt (subsidized federal)

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[voxveritatisetlucis]

Are you only taking out 10k? I would probably go private in this case

 

[keeppushing99]

Are you only taking out 10k? I would probably go private in this case

I’m commuting from home so i was thinking of taking 10k for my first and possibly $5k 2nd year but my 3rd and 4th year i will possibly take out more loans possibly a maximum of 20k for each of those years to cover housing near the hospitals. It might be much less though but that’s what I’m budgeting.

 

[voxveritatisetlucis]

Hmm the finance charge seems off to me. They are charging 27%!? fee? To be honest, I might just take the federal if that is true. Is that a one time thing or will it be for every additional loan you take out for them?

I’m now leaning more towards federal but wait to get some other opinions on here before committing if you can.

 

[mrbreakfast]

My school is offering a 10k private loan with a 5% interest rate. The loan’s interest rate starts applying 4 years after I graduate med school

If you are just asking about this particular loan as an M1, this offer blows any other possible loan offer out of the water. The interest rate is irrelevant because you have no interest for 8 years, which vastly outweighs the finance charge.

The math gets more complicated if you are planning on taking additional loans later on. If you are planning on taking $10K in year 1, $5K in year 2, and $20K in year 3 and 4, for example, you at graduation you'd need to compare:

a) $55,000 with a 5% interest rate starting in 4 years + $15,000 in finance charges (estimated) vs
b) the equivalent $55,000 at whatever interest rate the federal loan is offering

If the federal loan is 5% interest, the same loan values over your four years would end up with $61,138 at the end of medical school, which, without any payments on your part, would be $74,643 after 4 years of residency.

If you put $300/month toward your loans during those 4 years post-graduation, loan a) would be $40,600 + $15,000 fee while loan b) would be $58,739, both increasing at 5%.

Long story short - it all depends, but if you are planning on taking out bigger loans later on and the federal loan has a lower interest rate, it might be the better choice. If it has a higher interest rate, the private loan is probably better.

 

[NotAProgDirector]

If the private loan fee is fixed no matter how large a loan you take, you might be better off borrowing everything you think you might need for all four years at once. Then you can just put the extra in the bank. Since there's no interest. This assumes you trust yourself with the money, and won't blow it all on a Mercedes.

EDIT: Looking at your post again, I think the private loan may only be $10K max. In that case, my comment makes no sense at all.

 

[keeppushing99]

Thank you all so much for walking me through the pros and cons of both options. Just to clarify I do plan on taking more loans out my 3rd and 4th year at this point. I am also curious about the rise in federal interest rates that are expected to occur on july 1st, not sure if that’ll affect the federal loans if I don’t accept them before then. Currently the federal loans are at a 5.3% interest rate and the private loan is at a fixed 5%. Once again thank you all so much for all your insights, they have been so helpful.

 

[voxveritatisetlucis]

30 basis points is worth it imo for the security that comes with federal loans if both were accruing on the same schedule. Since they do not accrue on the same schedule, I believe private is the way to go.

 

[KnightDoc]

30 basis points is worth it imo for the security that comes with federal loans if both were accruing on the same schedule. Since they do not accrue on the same schedule, I believe private is the way to go.

30 basis point premium is a fantasy. As you surely know, interest rates have been rising for months. Federal loan rates for the coming academic are based on the 10 year Treasury rate at the last auction in May. 5.3% was last year's rate. Next year's rate will be 6.54%, plus a 1.057% origination fee, and there is no avoiding it because it is based on disbursement date, and no loan for next year will disburse before 7/1. It would be even higher if it was being calculated now.

An institutional loan at 0% for 8 years is a no brainer, no matter what the federal interest rate was, but 6.54% accruing immediately versus 5% accruing beginning in 2030 is a total no brainer, no matter what the origination fee is!

 

[keeppushing99]

Thank you so much everyone. I also realized I made an error in my original statement. The extra 2.7k is not a loan fee but rather a calculation of how much interest would be paid on the 10k loan if after the 8 years of being subsidized, I pay the loan back over a 10 year period. This actually I think makes my choice much easier but if anyone else would like to voice their opinions I would love to hear it.

 

[mrbreakfast]

The extra 2.7k is not a loan fee but rather a calculation of how much interest would be paid on the 10k loan if after the 8 years of being subsidized, I pay the loan back over a 10 year period.

You've gotta be missing something because I am struggling to understand why any institution would offer a loan like this. You're going to pay the entire loan back before any interest accrues.

If you are actually being offered a loan with 0% interest over 8 years and no fees, you should borrow the entire sum you'd want for all four years now, and invest some of it. Heck, just putting it into a savings account and withdrawing as needed would make you close to a grand over 4 years.

Unless this is an unusual form of financial aid (essentially a scholarship you have to pay back) I think there might be a clause you're overlooking - e.g. the interest is deferred unless you sign your first contract out-of-state, at which point the interest is applied retroactively and your loan rises to ~$14,900.

 

[KnightDoc]

You've gotta be missing something because I am struggling to understand why any institution would offer a loan like this. You're going to pay the entire loan back before any interest accrues.

If you are actually being offered a loan with 0% interest over 8 years and no fees, you should borrow the entire sum you'd want for all four years now, and invest some of it. Heck, just putting it into a savings account and withdrawing as needed would make you close to a grand over 4 years.

Unless this is an unusual form of financial aid (essentially a scholarship you have to pay back) I think there might be a clause you're overlooking - e.g. the interest is deferred unless you sign your first contract out-of-state, at which point the interest is applied retroactively and your loan rises to ~$14,900.

They're not missing anything. They are just saying that a $10K loan paid back over 10 years at 5% interest will incur $2.7K in interest over the payback period. The payback period does not begin until Year 9. I think that's probably what you are missing.

They can't load up like at an all you can eat buffet, because it's limited to $10K, not as much as they want. $10K is nothing when compared to a ~$90K COA at most schools for a single year! There is no opportunity to make close to a grand over 4 years, because the money will never be disbursed to the student. It will simply be applied to the tuition bill!

It's not an unusual form of aid. It's an institutional subsidized loan -- 0% while in school, and for a 4 year period after school, which is what makes it especially generous, followed by a standard 10 year payback period, during which interest will accrue and be payable monthly, just like any other loan.

 

[KnightDoc]

Thank you so much everyone. I also realized I made an error in my original statement. The extra 2.7k is not a loan fee but rather a calculation of how much interest would be paid on the 10k loan if after the 8 years of being subsidized, I pay the loan back over a 10 year period. This actually I think makes my choice much easier but if anyone else would like to voice their opinions I would love to hear it.

The choice was easy either way. This actually makes a lot more sense, since otherwise they just would have been making you pay the interest up front!

It's free money for 8 years, and then it's a 10 year loan at a lower interest rate than a federal one, with no origination fee. It's a no-brainer. The only thing you give up is the possibility of public service loan forgiveness, which is speculative at best and not worth giving up this deal for.

 

[keeppushing99]

Thank you so much @KnightDoc @voxveritatisetlucis and everyone else who has commented on this thread (it wasn't letting me @ you guys for some reason). I have accepted the institutional loan and I feel so much better knowing more about each of my options thanks to you all and i have realized how great of a loan this is for me.

 

[FlowRate]

For reference, 8 years of compounding annual interest on 6% interest rate for 10k would be ~16k so double the origination fee of the subsidized loan. (for 5%, ~15k)

The single year with a small loan like this is not enough money to worry about having limited repayment options vs federal loans. Even if you ended up with 40k of subsidized school loans, it's still not a huge monthly amount for the 10-year standard repayment. Would be a bigger issue if you had 400k in this type of loan and your only option was standard repayment (vs REPAYE etc.) in case you ended up not being able to work full time as an attending for whatever reason.