Save Big When You Pay Student Loan Interest While Still in School

January 15, 2014

Still in college and borrowing to pay for it? If so, there are some smart money strategies you can implement now to keep your debt under control (and even reduce it) while you’re in school. Paying at least your interest while you’re in college will make life better after graduation without seriously impacting your life now. So why not try it? Here’s what you need to know…

How interest accrues on student loan debt –

From the day your loan is disbursed – a couple of times each year and every year you’re in school if you’re a serial borrower – interest begins to accrue. If you have subsidized loans, the government covers the interest, but for unsubsidized and private loans, it accrues from day one.

Here’s how interest is calculated: rate x loan balance / 365 = daily interest

So if you borrow $5,000 in unsubsidized loans at 3.86%, your interest is 52 cents per day. No big deal, right? It’s roughly $200 of interest for year one. But for year two of your loans, you’ll have $10,200 accruing interest, so year two will be $395. Year three will be $15,600, which accrues $600. And for your last year of college, $21,200 of loans will accrue $820. That’s a total of $2,015 over the four years.

How capitalization affects future payments –

That doesn’t seem like much, but you also have to consider that this then impacts your entire repayment strategy. Let’s look at interest paid in school versus interest capitalized. If you pay your interest, you’ll start out with a $20,000 balance and if you don’t, you’ll start out with $22,015. Assuming your interest stays constant at 3.86%, here’s what you’re looking at:

A $20,000 starting balance paid out over 10 years will cost you $201 per month resulting in $4,140 in interest. By comparison, if your interest capitalizes in school, you’ll start your repayment period with a balance of $22,015. You’ll end up paying $221 per month and $4,556 in interest. But the key is that you must add the other interest onto this plus the additional $2,015 that accrued, which pushes it to $6,571. 

How much you would pay in school to cover interest –

In year one, you can pay just $16 per month. In year two, $32. Year three would be $48 and year four would be $64. That totals $1,920 in school. Add that to the interest you will pay after school of $4,140 and you’re looking at an interest savings of over $500. This is the minimum you’ll save. In fact, many people don’t pay their loans off in 10 years and their loan rates are much higher than the current 3.86%. 

The longer you take to pay your loans, the more you borrow and the higher your interest rates, the greater your interest savings will be if you pay interest on your loans as it accrues rather than waiting for it to pile up. The impact to your budget would be minimal – from 50 cents up to about $2 per day would easily cover your interest costs. This is a low impact, smart money strategy to make your financial future a little brighter. 

To keep track of your student loans from the moment you begin to borrow, sign up for a free student loan account with Tuition.io. You can track your balances, accruing interest and any payments you make while in school and the all the payments you make after. Also, read our blog and check out our Student Loan Help Center for more helpful info.