Why You Should Pay Your Accumulated Student Loan Interest While In College

By Uloop Guest Writer on August 29, 2016

By: Andrew Rombach

The majority of college students will take out student loans to finance their education, and the average student loan borrower will leave school with over $28,000 in debt. Millions of people take out unsubsidized federal loans or private loans, types of loans where the interest begins accruing as soon as you take out the debt.

While most lenders offer a grace period, where you do not need to make payments until six months after graduation, interest continues to accrue during this time. This buildup means that your balance is constantly growing, and interest is continually calculated based on the larger balance. In some cases, you can see your student loan balance balloon to thousands more than you originally borrowed.

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While money is tight in college, by cutting some corners and making some interest-only payments while still in school, you can get ahead of your debt. Here are three reasons why squeezing those payments into your student budget is a good idea:

You Will Save Money

If you pay off just the interest while in school, you keep your loan balance from swelling. That means you will pay less in interest over time than if you did not start making payments during your grace period. You could end up saving yourself thousands over the course of your loan.

For example, let’s say you take out a loan of $10,000 at 6% interest, which you will pay back over the course of ten years and you have four more years of school ahead of you. If you do not make any payments in school, the balance will rise to $12,700, and you will end up paying over $16,000 by the time your repayment period is overdue to interest payments.

However, let’s say you can squeeze just $50 a month out of your budget to pay towards your loans while you are still in school. Your total loan payment would drop nearly $1,000, saving you a significant amount of money. If you could seek out enough to cover both a principal and interest payment, you could save far more. Allocating just a little money while in school towards your debt can save you money in the long run.

To find out just how much you can save by paying just a little more each month, check out this prepayment savings tool. By entering your budgeted payment amount, you can see how much you will save over the length of your loan.

You Will Develop Strong Habits

Many students miss their student loan payments because, once the grace period is up, the monthly payment is a shock to their budgets. When they miss payments, the problem compounds, due to late fees and increased interest building up. Delinquency on payments is a quick path towards defaulting on your loans, ruining your credit and endangering your future.

By making regular payments a habit while in school, no matter how small, you will get used to budgeting for your debt and making timely payments. When your grace period is up, that will make the transition to paying the full bill much easier.

By having student loan payments as part of your budget for several years before they are due, you will be able to plan accordingly to keep up with your obligations.

You Will Be Debt Free Quicker

By making payments while still in school, you can shave off months or even years from your repayment term. Not only does that mean you will pay back much less in interest, but you will also be free from your loans much sooner.

Carrying student loan debt can inhibit your ability to live your life as you want. Your balance can keep you from getting the apartment you want, getting approved for a car loan, getting married, buying a house or even launching a business. With so much debt over your head, major purchases and life decisions are often put on hold.

By paying off the debt faster, you can have the freedom to make the decisions you want, when you want. You will have the money to travel, upgrade your home or start that business you always dreamed off. Being debt free opens up many more opportunities for you since you do not have the burden of a large student loan balance hanging over you.

Making student loan payments when you are living on ramen in college may not be easy, but if you are willing to sacrifice a little while in school, you can save money and set yourself up for a much more secure financial future. Part-time work, freelance gigs and one-off jobs like babysitting or dog-walking can give you the little extra money you need to pay off interest while you are a student. By scraping together just an extra $10-100 each month, you can end up in a much more stable position after graduation.

 

Andrew Rombach is a recent graduate from the University of Delaware. Andrew loves helping people better manage their finances. Andrew is working to repay a hefty student loan bill by the time he reaches 25.

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