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The cost of sending your student to college has never been more expensive. Federal and private education loans can help make that dream a reality for some families. However, borrowing money doesn’t just open doors; it comes with its own set of challenges, including selecting a repayment option.
The idea of making payments towards student loans before you are required might be the last thing you want to do. However, making even a small monthly payment while your student is in school could save your family big in interest payments.
Paying After the Grace Period
Let’s use an example. Say your family decided to take out a $12,000 loan to help cover the cost of your student’s first year of college. The loan has a fixed interest rate of 6.6% APR and a term of 10 years. If no payments are made until the end of the loan’s grace period after graduation (while the loan is automatically in deferment), several years later, the total cost of the loan will end up being closer to $21,031 after interest payments.
Not every type of loan accrues interest while a student is enrolled full-time. Subsidized loans from the US Department of Education don’t accrue interest until after your grace period or if you are enrolled half-time or less (as defined by your school). However, Unsubsidized Loans, Parent PLUS Loans, and most private student loans will start to accrue interest on the principal balance right away, even if payments aren’t due yet. If you aren’t sure what you borrowed, contact your student loan servicer, log into your account on the US Department of Education’s website, or reach out to your financial aid office.
It is important to also note here that not every student loan has the same six-month grace period. Earnest student loans, for example, have a nine-month grace period after graduation before borrowers have to start making payments.
Making Small Payments While In School
What if your student were to set aside $25 per month to make loan payments while in school? This might not seem like much, but the total amount of money you would pay on the loan would go down to $20,561 over the loan term, saving almost $470 vs making no payments while in school.
Covering Student Loan Interest Payments While In School
Looking to make a bigger dent in repaying that total loan cost? You and your student could make a plan to pay back the amount of interest on the loan each month while they are in school. In this example, that’s $66 per month, but it would save your family $1,241 and reduce the total loan amount to $19,790.
Principal and Interest Payments While In School
Finally, what if you and your student made principal and interest payments while in school? For this loan, it would equate to approximately $137 per month. This would bring the total cost of the loan down to $16,424.
That’s $4,607 in savings over the life of the loan vs not making any payments before the end of the grace period!
|In-School Payments||Principal||Interest||Total Cost|
|No In-School Payments||$12,000||$9,031||$21,031|
|$25 a Month||$12,000||$8,561||$20,561|
|Interest Payments ($66 a month)||$12,000||$7,790||$19,790|
|Principal and Interest Payments ($137 a month)||$12,000||$4,424||$16,424|
Picking a Student Loan Repayment Plan for Your Family
Each family is different and needs to weigh the pros and cons of making payments while in school. Do you currently have the extra money to commit to extra payments before the first payment would traditionally be due? Taking out a student loan is often the first major financial decision someone makes. Being proactive and budgeting for that debt can be a major influence in a student loan borrower’s future financial habits.
Check with your loan servicer before signing to make sure you can make payments on your loan balance before graduation as well.
Maximize your financial aid before borrowing
Before making any decisions about how you will borrow and repay your student loans, make sure you have filled out the Free Application for Federal Student Aid (FAFSA) and have explored your scholarship and grant options. These alternatives to taking on student loan debt are important for college students to maximize. Unlike a loan, scholarships and aid are free money you don’t have to pay back with interest.