Source
r/personalfinance•
shadowcman

Holding off on paying student loan interest until the grace period ends; good or bad idea?

My unsubsidized federal student loans accrued a total of $1200 in interest while in school and go into repayment in February 2015 (they’re currently in the 6 month grace period). Rather than pay off that interest now (which I am capable of), would it make sense to hold off on paying the interest until JUST BEFORE the grace period ends and they go into repayment?

If I understand student loan interest correctly, it does not compound like credit card interest, so the interest does not capitalize until the grace period officially ends in February. This should mean that between now and then the amount of interest that accrues per month will be the same regardless of whether or not I pay off the interest now or wait until then (assuming I do not put any money towards the principle).

The idea is that until the grace period ends I’ll be saving up a 6 month emergency fund and a week or so before they go into repayment I’ll pay off the entire $1200 plus all the interest that will have accrued between now and then to avoid having the interest added to the total amount of the loan. Please note that I ALREADY UNDERSTAND THAT THE IDEAL SITUATION IS TO START PAYING OFF PRINCIPLE AS SOON AS POSSIBLE.

Posted Aug 21, 2014, 12:58 PM UTC

3317
SHINE09•

If you pay some of the interest in this tax year you get tax benefits from it next spring.

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shadowcmanOP•

Thanks for reminding me about that. I'll probably be paying off the interest in late December now.

3
legrac•

Being able to deduct this depends on how much you make during the year as well--if you made over 75k (filing single) or 155k (filing jointly), you won't be able to deduct any student loan interest at all.

http://www.irs.gov/publications/p970/ch04.html

5
xtrexjpsouz•

The limits are a bit higher for 2014 but this is still a good point. I believe it's now $80K for a single person and $160K for married filing jointly.

2
[deleted]•

[deleted]

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shadowcmanOP•

This is incorrect. According to the IRS:

Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntary interest payments.

2
ben7337•

Unless you're still your parents dependent. Then you can't claim them. Plus if the standard deduction is more than your other deductions, it isn't worth it anyway from what I understand.

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hapludalf•

You don't have to itemize to deduct student loan interest.

4
SHINE09•

Check your facts

2
AdabadaYou•

Assuming it doesn't start compounding until the end of the grace period, yes, it makes sense. I can't confirm that from personal experience, though. Good luck :-).

6
silentasamouse•

It's a big 'if' for whether or not interest begins compounding at the end of the grace period. From personal experience, I thought the same thing and paid my balance in full 1 month prior to the first due date. It had already begun accruing interest, and I ended up owing more.

I would call your servicer and ask when interest begins accruing to be safe.

0
xtrexjpsouz•

Compounding is not the same as accruing.

Interest accrues on unsubsidized loans throughout your in-school deferment. Unpaid interest capitalizes (gets added to the principal balance and starts accruing its own interest) at the end of your grace period.

7
silentasamouse•

My apologies, you are right.

3
shadowcmanOP•

Interest has already started accruing but until I begin paying off the principle of the loan the amount of additional interest per month should be a fixed amount since it doesn't compound. It only compounds(technically it capitalizes) once the grace period ends.

2
AdabadaYou•

Oh. In that case I would probably pay anyways, if you can.

3
xtrexjpsouz•

You are correct, the unpaid interest will not capitalize until the end of the grace period. I would also agree that it's important to save up an emergency fund before tackling your debt.

6
[deleted]•

[deleted]

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[deleted]•

Yes, it is practically an interest free loan, allowing you to garner some interest in the meantime. This will net you a small gain. Just make sure the terms of your loan state you aren't accruing interest during this time, and that you don't spend the money you would have put towards the loans so you can make a lump payment when the grace period ends.

Edit: I apologize for the double post, mobile app behaved funny!

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