Should You Pay Down Your Student Loans During College?October 8, 2021
Depending on the type of student loans you have, it might make sense to make payments while you’re still in school. Both federal and private student loans are typically deferred until after graduation, which means you’re not required to pay until then.
With federal loans, you’ll even get a six-month grace period after you leave school, and some private lenders also offer that benefit.
But if you have unsubsidized federal student loans or private student loans, interest starts accruing from the date of your loan disbursement and also during the grace period.
Paying student loans while in school, even if it’s just to cover the interest, can lead to long-term savings, help build good financial habits early in your adult life and also help you pay off student loans early.
So if you’re wondering, should I be paying student loans while in school? And how can I pay off student loans while in college? Here’s what you need to know.
Benefits of Paying Off Student Loans While in School
Paying off student loans while in school can have a lot of benefits for students, as well as for parents who are borrowing to help put a child through college. Here are just a few to consider.
Avoid Capitalized Interest
As interest accrues on your student loans, it has to be incorporated into your repayment schedule. The way lenders do this is by capitalizing the interest, or adding it to the principal balance of the loan once you’re ready to start making payments.
The problem with capitalized student loan interest is that it effectively makes it so that you end up paying interest on the interest that accrued during your time in college. Paying off interest on student loans while in school helps you avoid capitalized interest and can save you hundreds or even thousands of dollars as you pay off your student debt after graduation.
Keep in mind, though, that if you have subsidized federal student loans, any interest that accrues while you’re in school, during the grace period and during future periods of deferment is paid by the federal government. So you don’t have to worry about paying off interest on student loans while in school if you have those loans.
Pay Off Student Loans Faster
Paying student loans while in school will ultimately make it easier to pay off student loans faster after you graduate. This is because your monthly payment will be lower without the capitalized interest, so you may have more room in your budget to make additional payments or even to refinance your loans with a shorter repayment term.
Some of the benefits of paying off student loans early include:
- Save money on interest
- Budget flexibility for other financial goals after graduation
- Lower your debt-to-income ratio, making it easier to buy a house
- Reduce your post-graduation financial stress
- Improve your lifestyle after college
And remember, you don’t have to worry about prepayment penalties on student loans, so you can pay them off as quickly as you want.
You Can Deduct Student Loan Interest From Your Taxes
Paying off interest on student loans while in school can also benefit you at tax time. The U.S. tax code allows student loan borrowers who pay interest on qualified loans to deduct up to $2,500 in student loan interest payments each year when filing their taxes.
This student loan interest tax deduction applies when you pay the interest yourself, and the loan is in your name, and that rule applies to both students and parents.
The deduction helps reduce your adjusted gross income, which is not only used to calculate your taxable income but also to help determine which other tax breaks you’re eligible to receive.
In other words, paying off student loans while in school can have both short- and long-term benefits.
Develop Good Financial Habits
Figuring out how to start paying off student loans while in school can also help you establish good financial habits early in your adult life.
It can help you budget your income in a way to prioritize your interest-only payments, and those monthly payments will also be reported to the credit bureaus, so you’ll also be able to establish your credit history. This will come in handy after you graduate and want to buy a car or a home or even just get a credit card.
How to Pay Off Student Loans While in College
Having a student loan repayment strategy is important, and deciding how to go about it will affect how much you save and how fast you can pay off your student loan debt. Here are the best ways to approach your goal of paying student loans while you’re still in school:
- Create a monthly budget
- Pay off high-interest loans first
- Set up automatic payments
- Choose a side hustle
Create a Budget
Creating a budget in college is important and can help you organize your finances to make sure you’re setting aside money every month to pay off student loans. Start by writing down your income from all sources and your typical monthly expenses, then look for opportunities to cut back in certain areas, so you can make room for student loan payments.
You can do this on your own or use one of several budgeting apps to set up and track your budget.
Pay Off High-Interest Loans First
If you don’t have enough cash flow to pay all of your accruing interest, prioritize the loans with the highest interest rates first. These are the loans that will end up costing you the most if you let the interest capitalize instead of paying it while in school.
If you’re wondering which student loans to pay first, log in to your account with your loan servicer or lender and review each loan’s terms to decide.
Set Up Automatic Online Payments
Setting up autopay for your loans will make them easier to manage because you won’t have to worry about making manual payments every month. What’s more, most federal loan servicers and private lenders offer interest rate discounts to borrowers who set up automatic payments, so you may also save a little money along the way.
Get a Job or Side Hustle
Finding a part-time job or a side hustle while you’re in school can take some extra planning with your coursework and social life. But with the right strategy, you can use the extra income that you earn to pay down your student loans faster.
It’s also a good idea to work full-time during the summer if possible, so you can reduce your reliance on student loans throughout the school year.
Consider Student Loan Refinancing
If you’ve been making student loan payments while in school and your goal is to pay off your student loans early, refinancing your student debt after you graduate can be a great way to help you save even more.
Student loan refinancing involves replacing your current loans with a new one through a private lender. The benefits of refinancing student loans can include lower monthly payments, lower interest rates, scheduling flexibility and more.
And the effort that you put in during college could help you meet the student loan refinancing eligibility requirements after graduation. In some cases, you may even be able to refinance while in school, though options can be limited because most lenders require that you have a bachelor’s degree to get approved.
Use ELFI’s student loan refinancing calculator to get an idea of how much you can save and whether refinancing is the right choice for you.*