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Interest begins to accrue at the time of disbursement on your unsubsidized loans. While you are in school and during your grace period, the interest which accrues is simple interest (it is not compounded). In other words, you are only charged interest on the original principal amount you have borrowed. When you enter repayment at the end of your grace period, all of the accrued interest will be capitalized (added to the principal) and, therefore, interest will accrue daily on this new amount for the duration of your repayment.
For example: If a $10,000 Unsubsidized Loan accrues $2,040 of interest (36 months at 6.8%) while you are in-school and through your grace period, then your new loan amount at the time of repayment will be $12,040. During repayment interest will accrue on this new amount of $12,040 on a daily basis. Each month you will pay some of the interest and some of the principal until it is paid in full.
You can elect to make interest only payments while you are still in school, or you can pay the interest off before it is capitalized just prior to entering repayment. Either of these options allows you to pay less during repayment since you will not be paying interest on the previously accrued interest. Most students cannot afford to pay the interest as it accrues and the savings you receive in doing so is not a significant amount of money. Paying interest before the capitalization, in this case, will save you $11.51 on a monthly basis or $1,380.86 over the life of the loan. However, as the amount you borrow increases, so will the amount of interest and this small amount could add up to bigger savings than stated here.
You can pre-pay any education loan at any point in time. You are not locked into a set number of years of interest or repayment. Keep in mind that if you do choose to make a payment larger than the required amount, unless the payment pays the loan off in full, you will still be required to make the next monthly payment on time and for the regular monthly amount. While the prepayment does not affect your monthly payment amount, it will affect the number of times you will need to make monthly payments. If you were on a standard 10 year repayment of 120 months and you prepaid an extra two months with your first payment (3 months at once), you will then have 117 months left of repayment and not 119. By prepaying a loan you are paying whatever interest has accrued to date and then principal. The more principal you pay, the less interest will accrue, saving you money and shortening your repayment time.
If you have several loans with one lender and you would like to prepay some of your higher interest loans, you should contact the lender first. The lender will be able to inform you of how to best go about communicating this information to them so that the credits are applied according to your wishes. If you do not communicate with the lender they will usually spread the prepayment evenly over all the loans you have with them.
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