So here's my situation. I'm about to graduate from undergrad with about $40K in various loans (much more than I would have liked, but c'est la vie). About half of them are unsubsidized and subsidized Stafford loans with relatively low interest rates, which I'll keep where they are.
The other half, about $20K worth, are private loans through Citibank, half of which are at a 10% and half at an 11% interest rate. There's about four or five thousand dollars in uncapitalized interest on these loans as well, that I'm not paying interest on, yet.
Next year I'm going to grad school to get my MA. It's funded, so I'm only going to have to take out a tiny bit of loan money to get by, but my aid package is enough that I could take the excess money and pay off my private loans through Citibank, replacing them with a mix of unsubsidized Stafford and unsubsidized Grad PLUS loans.
My question is whether it's worth doing. The interest rate for a Grad PLUS loan is 7.9% and I think it's 6.8% for an unsubsidized Stafford loan these days. So I'd be taking a pretty nice reduction in my interest rate on a lot of money, but I'd have to pay interest on that four or five thousand dollars from interest on the private loans. Does the reduction in interest rates more than make up for the extra money I'd be paying interest on? And for that matter, does interest from Stafford and PLUS loans automatically capitalize every period, or do they hold it aside like Citibank does?
It is definitely worth replacing your private loans with unsubsidized Stafford loans to the maximum amount you can; there's hardly ever a time when that isn't true. With those interest rates, it'd be good to go with the PLUS loans, too. Given how long you'll be paying these off, effectively capitalizing some of your interest a bit sooner is not a big long term impact.
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