What are the pros and cons of giving back unused student loan money at the end of the semester?

December 22, 2008 2:32 PM

I'm in my first year of law school and also a first-time student loan borrower. I ended up having a decent amount of loan money left in my bank account at the end of the semester. Should I pay it back or hang on to it?

All my loans are federal -- both types of Stafford and GradPLUS. The PLUS is my highest-rate (8.6% I think?), so if I were to pay the money back, it would go there.

The PLUS had a 3% origination fee that I believe I read would be waived if I paid back within 120 days of disbursement (i.e., this week). The deal is, you borrow"$X", you actually receive ($X-fee), and then you have to pay back $X. Theoretically, if you paid back the ($X-fee) before the time ran, you would be clear of the whole amount -- or at least that's my understanding. That won't happen, in my case, but I could pay back around half. The fee is not huge -- less than $300 total, so less than $200 at stake here.

Maybe more importantly, what's the story on in-school interest? Both the unsubsidized part of the Stafford and the PLUS loans charge interest while in school, and say that it will be added to the principal amount if not paid back during school. My lender's website reports a "Payoff Balance" around $500 higher than my loan amount (which, for the PLUS, is around 3.4% -- which doesn't correspond to anything that makes sense to me relative to my interest). Is that difference the interest? Should I pay it back now?

My priorities are keeping my ultimate burden as low as possible, but also not running short of money now (when I have much less of it!). Based on this semester, it looks like I should have plenty for the spring, but I might end up needing to save some for this summer if I don't have a paying job. I'm not opposed to paying as much as I can back now, but only if there is a good reason to do so.

Can anyone offer some advice on what I should do or at least on what I should consider?

(Lender is Citigroup/Student Loan Corporation, if it matters.)

posted by SuperNova to work & money (9 comments total)

You will need the money for summer unless you find paying work. I wouldn't count on finding paying work as a 1L but it is possible.
posted by norabarnacl3 at 2:41 PM on December 22, 2008 [1 favorite has favorites]

Absolutely save it for summer. If at the end of summer you still have some money leftover, then by all means pay it towards your loan.
posted by gatorae at 2:58 PM on December 22, 2008

Nthing the "keep it" recommendation, and not just because of the potential of you not finding paying work in the summer. The spring semester is functionally longer than the fall, even if there are the same number of class days in each. Fall generally runs from September to December, four months, while spring is January through May, five months. But loans are disbursed in two even payments, so if you don't have money left now You're Doing It Wrong.

Don't even start thinking about paying back loans until you have a job. This is far and away the cheapest money you're ever going to borrow, and the liquidity it provides will more than pay for itself when compared to the few bucks you might save in interest. Trust me: running out of money and getting hit with overdraft fees on your checking account--or worse, running up credit card debt--will cost you far more in the long run than your student loans.

Basically, with student loans the rule is to borrow as much as you can and keep it for as long as you can. Don't start making repayments until you absolutely have to. Once you do start making payments, then, by all means consider start paying it off as quickly as possible. But until then, the few hundred bucks you have in your hand now are worth far more than the few bucks you'd save.
posted by valkyryn at 3:11 PM on December 22, 2008 [3 favorites has favorites]

keep it... I actually ran out of money my second year of law school before I started my job for the summer. Very. Very. Ugly. I survived off of the charity of my friends and the very grudging charity of my father. But there were definitely some days where I had ten bucks in my bank account and I ate Ramen. If you want to pay it back, wait until you get a paying job for the summer.
posted by bananafish at 4:40 PM on December 22, 2008

Depends (sorry, lawyer answer).

If it's at a reasonable interest rate (<6>
If it's a higher interest rate, see if you would be able to take a short term emergency loan to get you to your next loan payout that might change things (check with your fin aid dept). That way you could apply for a larger loan in the next semester and pay off a short term (3 month) loan at that time with very little interest in the mean time.

The 3% fee is a sign of a loan you might want to reconsider taking next year (or 3L year) - look for a better lender. Graduate Leverage might be an okay place to start. Again, check with Fin Aid. You'll save more getting the best deal on the original loans than you will in paying back this particular loan amount.

In the end it comes down to simple math and a set of your own assumptions about budgeting for the next year. You financial aid department should be available to help you in both areas. Best luck!
posted by unclezeb at 5:05 PM on December 22, 2008

Liquidity is worth something. Would you pay whatever interest rate you are being charged as insurance to have cash just in case? Cash is king.
posted by JohnnyGunn at 5:57 PM on December 22, 2008

Do you have any higher interest-rate debt (credit cards, car loans, etc.)?

One possible problem with keeping it in your bank account is you will have to declare it on your FAFSA next year as an asset, if it is over the allowed amount it will increase your expected family contribution and reduce your need and thus your access to grants and subsidized loans.

Do you have any expenses that you know you will need to pay in the near future that you could pay before you file your FAFSA?
posted by Jacqueline at 6:59 PM on December 22, 2008

My SO borrowed every penny she could, and it's just about the best debt she could possibly have. The interest rate was higher when she was in school, but when she got out around 4 years ago, the rates on consolidation loans were stupidly low. (She's paying something like 3.2% IIRC)

The only lower interest rate debt she has is a balance transfer on a Citibank card she had around that time that's at 1.9% for the life of the balance.

Unless inflation runs rampant in the next few years, which seems unlikely at this point, despite all the money printing going on, interest rates will remain low and so student loan debt will end up being very cheap over the long term.
posted by wierdo at 11:24 PM on December 22, 2008

Normally, I'd say delay pay on student loans -- they're cheap, so put your money to work elsewhere. But I've gotten credit card offers recently that are cheaper than your GradPLUS loan. I used to know a guy who took out student loans and invested a corresponding amount in bonds and pocketed the difference, but this sounded wrong then and is flat out money losing advice today.

As a reference, my lowest student loans from undergrad are at 3.960 percent currently. This is pretty damn low, and as long as there's investments paying out more than this there's little reason to go beyond the minimum monthly payments.

Maybe more importantly, what's the story on in-school interest?

Subsidized loans have interest paid by the government while you're in school. Unsubsidized loans "capitalize" it, meaning they add it to the principal while you're in school. The easiest way to think of it is like an extra loan every compounding interval. The Payoff Amount likely includes a pro-rated interest payment.

I don't know the ins and outs of lawyer employment; are law students in the habit of donating summer vacations to charity?
posted by pwnguin at 11:45 PM on December 22, 2008