How to Save Money on Student Loan Payments While in School

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If you borrowed student loans to help pay for college, you may not be required to make any payments until after you graduate or drop below half-time enrollment. That sounds like a pretty good deal; no payments and no worries while you focus on your studies. However, you need to remember that if you take out a federal Direct Unsubsidized Loan, a federal Direct PLUS Loan, or a private loan, interest is still accumulating during all those months (or years) while you’re in school and not making any monthly payments.

Interest that accrues on your student loan will typically be capitalized when you begin repayment. That means any accrued interest during those months you are not making payments is added to the original principal amount of your loan. For instance, if you borrowed a $15,000 student loan with an interest rate of 6% as a freshman and made no payments for the four years you were in school, plus your grace period, 51 months would have passed. In this scenario, when you begin your repayment period, you would actually have a balance of $18,825 when you start repaying your loan 51 months later. That’s because $3,825 in interest (also known as capitalized interest) would have accrued during those 51 months and was added to your original loan amount.

Now, let’s say you have a part-time job while you’re in school, working 15-20 hours a week to help with some of your expenses. If you could simply pay around $75 a month toward that $15,000 student loan, you could actually pay all the accruing interest (remember, that’s $3,825 total that would have been added to your loan when your first scheduled monthly payment is due). If you’re able to pay $75 towards your student loan’s accruing interest, the total cost you could ultimately save over the life of a 10-year repayment period would be nearly $1,300. See the chart below for a comparison.

Paying Interest While In School (No Capitalized Interest) Fully Deferred Payments While In School – No Payments (Capitalized Interest)
Original Loan Amount $15,000 $15,000
Interest Accrued During In School and Grace Period (51 months) $3,825 $3,825
Interest Paid During In-School and Grace Period $3,825 $0
Loan Amount When Entering Repayment $15,000 $18,825
Number of Months of Repayment 120 120
Monthly Payment $166.53 $209
Total Interest Paid on Loan (including any payments during in school and grace period) $8,808.60 $10,080
Total Paid on Student Loan (original loan amount plus interest) $23,808.60 $25,080

As you can see from this example, making interest payments while you’re in school and during your grace period can save you money down the road. Plus, making payments during your in-school and grace period also gets you in the habit of making payments on your student loan and better prepares you for successful repayment. Remember, this is just an example of borrowing one loan during your freshman year of college. Imagine what the capitalized interest could look like if you borrow each year of college, or what your savings would be by making continued interest payments while you’re in school. You can learn more ways to save money on your student loans and get additional helpful information by visiting U-fi.com.

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