Question about how interest works on stafford loans

[azumzz]

Hey everyone,

Let me see if I get this right. Say my loan (assume 5% interest) compounds quarterly and that I have already accumulated 10k in interest. Also lets ignore principle payments for a moment. Does that mean that in the next 3 months, I will have 1.05% multiplied to my interest, and this will happen every 3 months. So at the end of the year, I will owe (1.05^4)*10k ?

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[a runner]

No, interest does not capitalize (compound) while you are in an in-school deferment status. It also does not capitalize during grace periods or while enrolled in IBR or PAYE. All accrued interest capitalizes once you enter any other repayment plan and capitalizes regularly thereafter.

 

[sazerac]

Therefore (1+(0.05*4))*10k. The capitalization rules on federal student loans are very strange, but benefit the student.

 

[dpmd]

Student loan interest is simple (not compounded). There are certain circumstances where there is a one time capitalization of interest, but once you are on a repayment plan (as opposed to forbearance or deferment that needs renewing) it will no longer capitalize (unless you change plans or go into a forbearance/deferment).