Save money by paying interest on student loans while in school
Amplify the perks by paying student loan interest while in college
Forty-six percent of federal and non-federal loans in 2017-18 were unsubsidized according to Trends in Student Aid 2018 by the College Board. That means that interest is accruing from the point of disbursement. Plus, all student private loans also accrue interest from the moment the funds are disbursed. Even though your lenders don’t require a student to make payments, there are three key benefits to making payments while in-school.
The big picture: Students who make interest-only payments while they are in school have stronger credit histories, save up to 29% on the cost of borrowing according to Sallie Mae, and have more resilient budgeting habits.
1. Making regular scheduled payments helps your credit history.
For most students, their student loans are their first forms of credit to be listed on a credit report. Although the existence of a student loan helps to start your credit history, most future creditors are interested to seeing that a person can make regular on-time payments. By making interest-only payments while you are in-school consistently, you create a credit tale of positive financial habits.
2. Reduce your overall cost of borrowing.
On a student loan of $5,500 borrowed at a rate of 5.05%, you will be charged approximately $231 in interest before you enter repayment. Consider making interest-only payments of approximately $23 a month to only every pay simple interest on your student loan.
3. Get used to budgeting for repayment monthly.
When you finance a car or home, typically you enter into repayment the month after you get the keys. This means immediately following getting the benefit of the student loan, you start regular payments. Wouldn’t it be better to think about your student loan in the same way. Once you get notified of the college receiving the electronic funds transfer (EFT), budget for the interest-only payment. It may not be as much as when you enter full blown repayment, but it does get you in the habit of ensuring payments happen monthly.
Colleen MacDonald Krumwiede is a financial aid expert with over a decade of financial aid experience at Stanford GSB, Caltech, and Pomona College and another decade at educational finance and technology companies servicing higher education. She guides go-to-market strategy and product development at Pay4 to transform the way families afford college.