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| Financial Aid > Loans | Revised 3/29/05 |
The Bottom Line On Loan Capitalization
Do you capitalize interest payments?
Capitalization allows you to delay making interest payments until you begin repaying your loan. With capitalization, interest payments are added to your principal (the amount you borrow) on your unsubsidized Federal Stafford loans. This increases your balance (the amount you owe) and your monthly payments. A lender may capitalize your interest every 3 months; every 6 months; once each year; or just one-time, when repayment begins. (It's the lender's choice)
Tip: To save big money, choose a lender that offers one-time capitalization at repayment.
If you don't quite grasp the concept of capitalization, here are some things you should know:
- You are not alone. Most people, including bankers, have never even heard of the word because it exists only in the world of student loans. (That's because all other forms of consumer credit go into repayment the instant they are used).
- The formula is fairly simple. When a lender capitalizes a PLUS or SLS loan, the deferred (or delinquent) interest is added to the borrower's outstanding principal. The repayment schedule is then recalculated based on the original principal and the accumulated or capitalized interest.
- Capitalization can be needlessly confusing. The main reason for the confusion is that each lender has its own policy as to when and how often they capitalize their student loans. Some lenders do it annually, twice each year, quarterly, or one time at repayment. That's because one-time capitalization is the best deal for students and families.
- The difference between lenders can mean significant savings for borrowers. Just look at these figures comparing the savings of one-time capitalization against quarterly, semi-annual, and annual capitalization. This example is based on borrowing $4,000 each year at 12% annual interest; 120 months repayment; no deferments; with the borrower in school for 4 years without making loan payments:
| Interest Accrued in School | Balance at Repayment | Monthly Payment | Total Payment | |
|---|---|---|---|---|
One-time |
$ 4,800.00 | $ 20,800.00 | $ 298.42 | $ 35,810.35 |
Annual |
$ 5,411.39 | $ 21,411.39 | $ 307.19 | $ 36,862.95 |
Semi-Annual |
$ 5,593.78 | $ 21,593.78 | $ 309.81 | $ 37,176.96 |
Quarterly |
$ 5,690.98 | $ 21,690.98 | $ 311.20 | $ 37,344.31 |
Bottom line, one-time capitalization
policy saves the borrower as much as $1,533.97!!!
Consolidating Your Education Loans
If you (or you and your spouse) have more than one type of education loan, or have borrowed from more than one lender, or need relief from high monthly education loan payments, you can combine--or consolidate--all your loans into one new loan and one monthly payment. This process is called consolidation.
Here are the answers to the questions borrowers frequently ask about loan consolidation:
Why should I consolidate my education loans? Consolidation makes repayment easier and can lower your monthly payment. You will be responsible for just one loan payment each month (instead of a separate payment for each of your loans); you will deal with just one lender; and your repayment schedule will be extended. Married couples may consolidate their loans into one account.
Is there a downside to loan consolidation? The interest rate on the consolidated loan may be higher than the rates of your other education loans. As a result of the higher interest rate and the longer repayment schedule, the total interest you will pay on the loan can be much greater than you would have paid without consolidating. Only you can decide if a lower monthly loan payment and the flexibility of dealing with just one lender offsets the increased finance charge.
Do I qualify for loan consolidation? You qualify if you can consolidate loans from the eligible loan programs listed below and you are in the grace period or in repayment for each loan to be consolidated. Some lenders require you to consolidate a specified minimum amount of loans to qualify for their consolidation program.
Which types of loans can be consolidated? Federally Insured Student Loans (FISL); Guaranteed Student Loans (GSL); subsidized and unsubsidized Federal Stafford Loans; Auxiliary Loans to Assist Students (ALAS); Supplemental Loans to Assist Students (SLS); National Direct/Defense Student Loans (NDSL); Parent Loans to Undergraduate Students (PLUS); Nursing Student Loans (NSL); and Health Professional Student Loans (HPSL). Although other education loans such as Law Access Loans cannot be consolidated, the amount of those loans will be considered in calculating the length of repayment on the consolidated loan.
What is the interest rate? The interest rate is fixed and is based on a weighted average of the rates on the loans being consolidated, rounded up to the nearest whole percent.
Are there any fees or charges? There are no origination fees, service charges, or prepayment penalties.
How long will I have to repay my loan? Your repayment period will depend on the amount consolidated and the amount of your outstanding education loan debt. The following chart will help you estimate your repayment period:
| Total Debt | Typical Repayment Term |
|---|---|
| $ 7,500 - $ 9,999 | 12 Years |
| $10,000 - $19,999 | 15 Years |
| $20,000 - $39,999 | 20 Years |
| $40,000 - $59,999 | 25 Years |
| $60,000 or more | 30 Years |
How much will my monthly loan payment be? Most lenders offer several repayment plans including lower payments for the first few years when you may be starting your career or facing high expenses; graduated payments that increase over time; and level payments. The amount of your payment will depend on the repayment plan offered by your lender.
Following are some typical examples from a consolidation loan program. The examples assume an 8 percent consolidation loan interest rate.
| Amount Owed in Student Loans | Typical Initial Payment Before Consolidation | Typical Initial Payment After Consolidation | Typical Savings |
|---|---|---|---|
| $ 9,000 | $109 | $ 60 | $ 372 |
| $17,000 | $215 | $114 | $ 1,078 |
| $30,000 | $363 | $201 | $ 3,145 |
| $50,000 | $605 | $335 | $ 7,550 |
| $70,000 | $845 | $469 | $14,065 |
When may I consolidate my loans? Anytime during your grace or repayment period. If you want to take advantage of your grace period, submit your application no earlier than four months into the grace period for the loans you want to consolidate.
How can I learn more about consolidating my loans? Talk with your lender. They will explain how consolidation works and help you decide on the repayment plan that's best for you.
When Your Student Loan Is Sold
Has your lender sold your student loan or transferred it to a servicer? No problem. Lenders sell their student loans--and their car loans, home loans, and boat loans--all the time.
But as a borrower who must pay back a loan, you can save yourself a lot of confusion if you know these basic facts about lenders, secondary markets, servicers, and student loans:
- Why do lenders sell their loans? For a variety of reasons, but usually to get cash in order to make more student loans. The loans are mainly sold to other lenders and organizations in the "secondary market" which is made up of state and private education organizations that specialize in buying and "servicing" student loans.
- What is Servicing? Some lenders and all secondary markets have contracts with student loan servicers, which are companies that take care of all the details-like collecting and processing payments, handling inquiries, and maintaining loan records-for them. Loan servicers "service" loans for many lenders and secondary markets at the same time.
- How will I know if my loan has been sold? You will receive a letter from the lender who is selling your loan. When the loan is actually sold, the new owner or its servicer will send you a letter that explains why the loan was sold, who the new owner is, where to send your payments, and where to call if you have any questions. The letter will include a statement listing the loans they are servicing for you, the dates you took out the loans, the interest rate, the names of the loan programs, and the total amount you owe.
- What happens when my loan is sold or transferred? You become indebted to the new owner of your loan not your original lender. The new owner or its servicer may send you a new coupon book for your payments and may offer you some services that were not available from your original lender. But rest assured, the rate and terms of your student loan will not change.
Reporting Changes
Many borrowers think they do not have to worry about managing their educational loans until they graduate of finish school. NOT TRUE. If you transfer schools, drop credits or extend your studies, YOU are responsible for keeping your loans in good standing and for reporting certain changes.
Schools periodically update enrollment status for lenders, but YOU ultimately are responsible to meet the terms of your promissory note. Otherwise, your loan can go into repayment without your knowledge, become delinquent, and then be placed in default. Keep your lender and current school informed of name, address, enrollment status and any school changes.
Transferring Schools Or Extending Enrollment
Lenders use the anticipated graduation date listed on your most recent loan application to put the loan into repayment, unless otherwise advised by the school. If the date you complete your studies is different because you transfer to another school, inform your lender, even if you do not get another loan, so that enrollment verification can be obtained. Otherwise, you may be billed while you are still in school. Request an extension by completing can in-school enrollment verification form from your school and mail it to your lender.