Current Events > Why is capitalization a thing with student loans?

(+) Yeah! (+)

Do other loans do this?

Because it seems to serve zero purpose but screw people over who actually are paying.
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Because student loans can be deferred while most other types of loans can't. Capitalization only really applies when the loan is in deferment status.

Annihilated posted...

Because student loans can be deferred while most other types of loans cant

Okay? Why is capitalization needed? Interest for unsubsidized loans still accrue. Why does it need to capitalize?

Forbearance capitalizes interest. Most student loans capitalize WITHOUT any action at set times, like quarterly.

Why is this a concept? If someone falls behind, presumably paying is an issue. Why is increasing the principle directly and the accrued interest indirectly the consequence? Effectively making paying harder.
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It's just how loans work
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cuttin_in_farm posted...

Effectively making paying harder.

It's a feature not a bug.
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EndOfDiscOne posted...

It's just how loans work

Why? Only student loans do this, to my knowledge.

Are you okay with this?
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there's no asset to back the loan. if i fall behind on my car payment or home mortgage the bank can just repossess the car or house, but it's not like they can take back your education, so predatory shit like this is needed
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Romulox28 posted...

there's no asset to back the loan. if i fall behind on my car payment or home mortgage the bank can just repossess the car or house, but it's not like they can take back your education, so predatory shit like this is needed

Federal loans are backed by the department of Ed. Which means they can garnish your shit.

I can get an unsecured loan or credit card and still not deal with capitalization.

Private loans have scam level interest.

Why is this a thing?
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cuttin_in_farm posted...

EndOfDiscOne posted...

It's just how loans work

Why? Only student loans do this, to my knowledge.

Are you okay with this?

Most loans have monthly payments due right away. If you're going to wait several years before paying, the bank is missing out on the interest. To me it makes sense that it would be capitalized into the loan.
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EndOfDiscOne posted...

cuttin_in_farm posted...

EndOfDiscOne posted...

It's just how loans work

Why? Only student loans do this, to my knowledge.

Are you okay with this?

Most loans have monthly payments due right away. If you're going to wait several years before paying, the bank is missing out on the interest. To me it makes sense that it would be capitalized into the loan.

Subsidized loans do not not accrue interest. The interest is simply being paid by the government.

Private loans, despite being deferred, still accrue interest just like federal unsubsidized loans do.

So no one is missing out on interest anywhere.

If anything, since no payment is made, student loans accrue more interest than any loan type. All that juicy interest immediately capitalizes after your grace period btw.
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Putting aside the politics of student loans, the reason for this is the time value of money. Loan payments are worth more today than they are tomorrow. A deferred payment is value lost to the lender.
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Polycosm posted...

Putting aside the politics of student loans, the reason for this is the time value of money. Loan payments are worth more today than they are tomorrow. A deferred payment is value lost to the lender.

How if interest still accrues. Using this logic only helps my argument since capitalization makes loans cost more later. While still accruing full interest.
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cuttin_in_farm posted...

Do other loans do this?

Because it seems to serve zero purpose but screw people over who actually are paying.

If you are paying down the loan or making interest-only payments, then capitalization does not apply. It's only those that think they can let the loans sit around inactive without penalty that get hit by this.

It only makes sense if you choose to think about it. If you choose to defer the loan when the payments are expected, the bank can do one of two things with the unpaid interest: either demand all of the interest due with the first payment being made (not likely to be met in full by the debtor), or roll the interest into the principal every month it is deferred.

Or would you prefer that banks not allow one to defer payments and require the minimum be paid on-time even if the debtor is still in school and/or not working? And don't even try to say that banks should allow one to defer their loans for free: banks are not a charity.
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Paragon21XX posted...

Or would you prefer that banks not allow one to defer payments and require the minimum be paid on-time even if the debtor is still in school and/or not working? And don't even try to say that banks should allow one to defer their loans for free: banks are not a charity.

This doesnt make sense to me.

To not pay, means its accruing interest. The guy who defers three years is still paying more overall than the guy who pays immediately even without capitalizing.

Deferring for free is a false statement. The price is that the interest is going unpaid.

We should be rewarding those that pay. Not harming those that cant.
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iT'S SPELT WITH AN S

aMERICANS
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cAPITALISATION posted...

iT'S SPELT WITH AN S

aMERICANS

Its either or.
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Is it really uncommon to be bothered by this? Is there no one in agreement?
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