Making Private Student Loan Payments While in SchoolMarch 9, 2023
When you borrow money to fund your education, you usually will not have to pay your student loans while you are still working on earning a degree — although that’s not always the case.
The big question, though, isn’t whether you must work on paying back your loans while in school. Instead, the issue to consider is, do student loans accrue interest while in school? Since the answer to this question is often yes, you may want to consider paying private student loans even while completing your education.
Do student loans accrue interest while in school?
Most student loans you take out will accrue interest while you are still going to school. The only exception to this is Direct Subsidized Loans. With these loans, the government subsidizes the cost of interest during the time you are earning your education, as well as during grace periods and when your loans have been deferred.
But, for other loans, the answer to the question, is interest accruing on student loans is yes — even while you are still working on earning your degree. In fact, with other types of federal loans and with private student loans, interest generally begins accruing as soon as your loans have been distributed.
Since interest starts being charged from day one, your loan balance will grow over time if you are not making payments. As interest is charged, you will owe the principal and the interest you have accrued, so you will have a bigger balance.
Eventually, with most loans, the interest is capitalized, which means it is added onto the principal balance, and you pay interest on the interest. To take a simple example, if you owed $100 and you accrued $10 in unpaid interest charges, you would have a new balance of $110, and interest in the future would be calculated based on your $110 balance.
It is very important to understand the answer to the question so student loans accrue interest while in school. Knowing this answer could help you make a more informed choice about whether to make private student loan payments while you’re still earning your degree.
Do you have to pay student loans while in school?
With most student loans, there is no requirement for you to make payments while you are still in school. This is true of both federal and private student loans.
In fact, many lenders don’t even require you to make your first payment until you have completed a grace period lasting several months after graduation. Payments are usually triggered by dropping below half-time enrollment, but this won’t affect you if you’re still going to school full-time.
Some private lenders have different policies and may require you to make at least a small payment even as you get your education. You should check the terms of your loan to find out the answer to the question, do you have to pay student loans while in school for your particular loan type?
Should you pay private student loans while in school?
While the answer to the question, do you have to pay student loans while in school, is typically no, this doesn’t necessarily mean you want to wait until after graduation to begin making payments. After all, as mentioned above, interest is still accruing in most situations — and it is making your loans more expensive by the day.
Since you know the answer to the question, is interest accruing on student loans is yes, you may decide to voluntarily make a payment that at least covers the amount of interest you have been charged over the past billing cycle. If you can pay the interest on your loans, then you will avoid your balance growing and avoid interest capitalization.
You don’t want to make these payments on Direct Subsidized Loans, but on private loans and some federal loans, it makes a lot of sense to cover interest costs if you can. That’s because doing so can save you a lot of money. To see how much, consider the following example.
Say you borrow $10,000 per year on a loan at 6.8% interest with a 10-year repayment term and a six-month grace period after graduation. If you go to school for four years, borrow this amount each year, and plan for payments to begin after your grace period, you would graduate with a loan balance of $45,820.53, and your monthly payments would equal $545.49 per month.
But, if you cover your interest costs while in school, you would graduate with a balance of just $40,000 and monthly payments of $460.32 per month. You would have paid interest over those four years of schooling, but you would avoid a substantial amount of interest being tacked onto your loan and avoid raising your future payoff costs.
Even if you can’t cover the entire interest amount, making small monthly payments while in school can make a difference. It’s worth considering if you can afford to do it.
Other options for reducing student loan costs
Paying private loans while in school can help you reduce borrowing costs, but it’s only feasible for some.
The good news is that other ways to reduce your interest expenses include refinancing private student loans after graduation. If you can qualify for a new loan at a more competitive rate, you can save money each month and over time as you work to pay back what you borrowed.