Student loan interest capitalization

[climbhigh]

Trying to run some numbers to see if I would benefit from student loan refinancing. Current 3rd year resident, still have 2 years of residency left plus 1 year of fellowship. Graduated med school with 190k in loans at 6.8%, which has now generated 30k in interest thus a current total of 220k.

Here is my question: if I refinance, will all of the current interest get capitalized? Whereas I currently am paying 6.8% on 190k, if I refinance will I be paying a lower interest rate on the full 220k, essentially negating the lower interest rate?

In the next few months I will be starting to throw some serious cash towards the loans (getting wife's loans paid off first), so I was thinking it may be better to first pay off the interest that has accumulated, then refinance the loans at a lower interest rate. Thoughts?

[FCP]

climbhigh wrote:

Trying to run some numbers to see if I would benefit from student loan refinancing. Current 3rd year resident, still have 2 years of residency left plus 1 year of fellowship. Graduated med school with 190k in loans at 6.8%, which has now generated 30k in interest thus a current total of 220k.

Here is my question: if I refinance, will all of the current interest get capitalized? Whereas I currently am paying 6.8% on 190k, if I refinance will I be paying a lower interest rate on the full 220k, essentially negating the lower interest rate?

In the next few months I will be starting to throw some serious cash towards the loans (getting wife’s loans paid off first), so I was thinking it may be better to first pay off the interest that has accumulated, then refinance the loans at a lower interest rate. Thoughts?

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I refinanced with DRB, and interest does not get capitalized with their loans.  If you decide you want to refinance, I would do it ASAP.  Unless I am misunderstanding your question, It makes no sense to "wait to pay off the interest that has accumulated", when you can refinance to a lower interest rate immediately and have that interest not capitalize.  It takes months for DRB to take over your loans anyway, so might as well put in the application now (I applied to refinance 325k in loans in April 2015, and they took the loans over in August.

[shantster]

FCP wrote:

It takes months for DRB to take over your loans anyway, so might as well put in the application now (I applied to refinance 325k in loans in April 2015, and they took the loans over in August.

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Seriously that long? I have been waiting since January 25 to get my final documents. I have emailed a few times and keep being told that they are having a delay due to high volume and cannot estimate when the documents will be available.

[PNWskindoc]

Hrm, I refinanced with DRB as well and I'm pretty sure my interest capitalized. I ran the numbers and i still came out ahead. Like you said, it was essentially paying a higher interest rate on a lower principal amount ( 6.8% on 190k) or paying a lower interest rate on a larger capitalized amount (3-4% on 220k). Pretty straightforward to run those numbers once you actually get a rate from DRB.

[Matt]

Yes, all outstanding interest will be capitalized.  If your rate is significantly lower (I went from 6.8 to 3.25), you should still come out WAY ahead, but obviously run the numbers yourself.

On a side note, the capitalized interest is considered "paid", so you will get a 1098-E for this amount (mine was 44K).  Of course if you're already an attending you will almost certainly be phased out of the student loan interest deduction.  I was a bit peeved when I realised that...  This is another BIG plus for refi'ing while still a resident.

[FCP]

Your interest does NOT get capitalized as a resident/fellow. It may as an attending (I briefly reviewed the terms on the website), as it did not state otherwise.

From DRB:

Borrowers are able to remain on the $100/month schedule up to 6 months after the completion of training
Accrued interest does not capitalize while paying $100/month

[Matt]

You're misreading that.  Your outstanding interest from the OTHER company (eg Sallie Mae), WILL be capitalized at the time that loan is paid off/transferred to DRB.  AFTER DRB holds the loan, no further accrued/unpaid interest will be capitalized (ie when you're on the $100 a month schedule, you're not even covering the accrued interest, and they're saying that this will not be capitalized (unless of course you refinance with another company)).

[FCP]

I think you are misreading what I have posted. I agree with what you posted above, nothing that I posted went against that.

[PNWskindoc]

FCP wrote:

I think you are misreading what I have posted. I agree with what you posted above, nothing that I posted went against that.

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Right, but I think the question the OP was asking is whether he would only have to pay interest on the principal amount or the interest + capitalized amount after refinancing with another company. The way you responded to the OP (which I guess Matt and I misread) is that you he would only have to pay interest on his 190k (principal amount) and not the 220k (principal + capitalized amount) which is not true. However as you stated, once the OP does refi, his interest does not get capitalized while he's in the resident repayment program ($100/mos) until the grade period expires, which at that point any unpaid interest will be capitalized.