A typical four-year degree can cost $115,000 or more, according to a 2023 College Board report. Borrowing money to pay for college adds to the total cost, due to interest.
To lower the overall cost of your education, consider making optional student loan payments while you’re in school or during your grace period. Even if you can only afford a small amount, every payment you make will decrease the amount of interest that accrues. You could save thousands over the life of your loan.
Interest begins accruing on most private student loans and some federal student loans as soon as students receive the money, even if payments aren’t due,” says Jill Desjean, senior policy analyst with the National Association of Student Financial Aid Administrators.
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There is one exception: If you qualify for federal subsidized Direct loans, the government covers the interest charges while you’re in school and during your grace period.
The impact of making student loan payments while in school
Paying even small amounts while you’re in school can add up. Consider this hypothetical example: Let’s say you take out $10,000 your first year of school at 6.53% interest on a 10-year repayment term. Here’s how different repayment amounts impact your total savings:
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If you don’t make in-school payments, you’ll pay $141 per month once your repayment period starts. By the end of your repayment term, you’ll pay a total of $17,653.
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If you pay $25 per month while in-school, you’ll pay $132 per month once your repayment period starts. By the end of your repayment term, you’ll pay a total of $17,161 — a savings of $492.
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If you pay $50 per month while in-school, you’ll pay $116 per month once your repayment period starts. By the end of your repayment term, you’ll pay a total of $16,669 — a savings of $984.
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If you pay $100 per month while in-school, you’ll pay $86 per month once your repayment period starts. By the end of your repayment term, you’ll pay a total of $15,686 — a savings of $1,967.
If you have multiple loans and can’t afford to make payments toward all of them, pay the one with the higher interest rate first, says Amy Lins, vice president of customer success with Money Management International, a non-profit financial education agency.
Making payments will also help you avoid the effects of capitalization — where interest is capitalized and added to your principal balance. Capitalization is typically what people mean when they talk about paying interest on your interest. By making payments while in college, you can cut down on the amount that’s capitalized, preventing your loan balance from ballooning out of control.
When should you skip in-school payments?
Depending on your circumstances, making in-school payments may not make sense. If you fit into one of the following groups, you may be better off deferring your payments until you leave school and your grace period ends.
You can adjust your budget
If you find that you can afford to pay $50 or more per month, you may need to rethink your budget and approach to borrowing.
“While making payments during school can save student loan borrowers money, the cheapest option is to not borrow at all because of loan origination fees,” Desjean says. “If you’re in a position to make payments on your loans during school, examine whether you can use that extra money to pay for school expenses directly without borrowing.”
Similarly, if you borrow money, the school will send you a check for the excess amount after covering your tuition and fees. You can use the cash to cover other education expenses, including your textbooks and meal plan. But according to Robert Farrington, founder of The College Investor, those excess dollars are an opportunity to reduce your debt.
I would always encourage you to minimize lifestyle expenses,” he says. “Maybe get an extra roommate or anything you can do to save money, and then you can take that refund and put it right towards your student loan. Even if you wait until the end of the semester or the end of the academic year, I would throw it right back at your student loans ahead of time instead of keeping that.”
You’re pursuing loan forgiveness
If you’re planning on working as a teacher or for a non-profit organization, you may qualify for loan forgiveness under Public Service Loan Forgiveness (PSLF), so making extra payments may not make sense.
“If you’re working in public service and qualify for PSLF, you could end up a lot wealthier in life by paying as little as legally allowed on your loan and receiving loan forgiveness,” Farrington says. “If you know what direction you’re taking while in college, you can give yourself a head start.”
You have other debt
Your student loans may not be the only form of debt you have. And if you have other debt with higher rates, it may be financially wise to target the highest-interest debt first.
“If someone has accumulated credit card debt, for example, that’s likely to be at a much higher interest rate [than student loans],” says Lins. “And I would tackle that first to keep that credit card balance from growing.”
You have subsidized federal student loans
If you have subsidized federal student loans, which are available to students with financial need, interest does not accrue while you’re in school or during your six-month grace period. If you have this type of loan, your balance won’t be larger upon leaving school than it was when the loan was disbursed.
However, making in-school payments if you’re able can still help you in the long run, because interest will accrue on a smaller balance once you leave school.
