A typical four-year degree can cost $115,000 or more, according to a 2023 College Board report. Borrowing money to pay for college adds to the total cost, due to interest.
To lower the overall cost of your education, consider making optional student loan payments while you’re in school or during your grace period. Even if you can only afford a small amount, every payment you make will decrease the amount of interest that accrues. You could save thousands over the life of your loan.
“Interest begins accruing on most private student loans and some federal student loans as soon as students receive the money, even if payments aren’t due,” says Jill Desjean, senior policy analyst with the National Association of Student Financial Aid Administrators.
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There is one exception: If you qualify for federal subsidized Direct loans, the government covers the interest charges while you’re in school and during your grace period.
The impact of making student loan payments while in school
Paying even small amounts while you’re in school can add up. Consider this hypothetical example: Let’s say you take out $10,000 your first year of school at 6.53% interest on a 10-year repayment term. Here’s how different repayment amounts impact your total savings:
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If you don’t make in-school payments, you’ll pay $141 per month once your repayment period starts. By the end of your repayment term, you’ll pay a total of $17,653.
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If you pay $25 per month while in-school, you’ll pay $132 per month once your repayment period starts. By the end of your repayment term, you’ll pay a total of $17,161 — a savings of $492.
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If you pay $50 per month while in-school, you’ll pay $116 per month once your repayment period starts. By the end of your repayment term, you’ll pay a total of $16,669 — a savings of $984.
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If you pay $100 per month while in-school, you’ll pay $86 per month once your repayment period starts. By the end of your repayment term, you’ll pay a total of $15,686 — a savings of $1,967.
If you have multiple loans and can’t afford to make payments toward all of them, pay the one with the higher interest rate first, says Amy Lins, vice president of customer success with Money Management International, a non-profit financial education agency.
Making payments will also help you avoid the effects of capitalization — where interest is capitalized and added to your principal balance. Capitalization is typically what people mean when they talk about paying interest on your interest. By making payments while in college, you can cut down on the amount that’s capitalized, preventing your loan balance from ballooning out of control.
When should you skip in-school payments?
Depending on your circumstances, making in-school payments may not make sense. If you fit into one of the following groups, you may be better off deferring your payments until you leave school and your grace period ends.
You can adjust your budget
If you find that you can afford to pay $50 or more per month, you may need to rethink your budget and approach to borrowing.
“While making payments during school can save student loan borrowers money, the cheapest option is to not borrow at all because of loan origination fees,” Desjean says. “If you’re in a position to make payments on your loans during school, examine whether you can use that extra money to pay for school expenses directly without borrowing.”
Similarly, if you borrow money, the school will send you a check for the excess amount after covering your tuition and fees. You can use the cash to cover other education expenses, including your textbooks and meal plan. But according to Robert Farrington, founder of The College Investor, those excess dollars are an opportunity to reduce your debt.
“I would always encourage you to minimize lifestyle expenses,” he says. “Maybe get an extra roommate or anything you can do to save money, and then you can take that refund and put it right towards your student loan. Even if you wait until the end of the semester or the end of the academic year, I would throw it right back at your student loans ahead of time instead of keeping that.”
You’re pursuing loan forgiveness
If you’re planning on working as a teacher or for a non-profit organization, you may qualify for loan forgiveness under Public Service Loan Forgiveness (PSLF), so making extra payments may not make sense.
“If you’re working in public service and qualify for PSLF, you could end up a lot wealthier in life by paying as little as legally allowed on your loan and receiving loan forgiveness,” Farrington says.
“If you have a clear direction in mind during your college years, you can set yourself up for success right from the start. Knowing where you’re headed can give you a significant advantage as you navigate through your academic journey.
Dealing with student loans is just one part of managing your finances. It’s essential to consider other debts you may have, especially those with higher interest rates. Prioritizing the repayment of debts with higher interest rates, such as credit card debt, can help prevent them from growing and becoming unmanageable.
If you have subsidized federal student loans, you have the benefit of interest not accruing while you’re in school or during the grace period after graduation. While you won’t see an increase in your balance during this time, making payments while in school can still be advantageous in the long run by reducing the overall interest accrued on a smaller balance post-graduation.
Understanding your financial situation and taking proactive steps to manage your debts can set you on the path to financial stability and success in the future.”