Paying interest on your student loan while you’re in school can save you money and help you pay off your loan faster. And it’s easier than it sounds. Here are some facts you should know about student loans, and tips to help you lower the overall cost of your education.
Interest accrues each month
Except for subsidized federal student loans, where the government pays your interest for you while you’re in school, interest is charged each day on your student loans. Look up your account online or call your loan servicer to find out how much interest accrues each month on your loans, or calculate it yourself by using this basic formula:
Interest rate multiplied by your balance, then divided by 12 (number of months in a year) equals the approximate interest accrued each month.
Example: As a freshman, John takes out a $5,500 student loan with an interest rate of 6.8%. By multiplying .068 by 5,500 and dividing by 12, John calculates that approximately $31 in interest accrues each month on his loan.
||Monthly Interest Accrual
Capitalization increases your amount of debt
Capitalization occurs when unpaid interest is added to the loan balance and interest then accrues on the new larger balance. On most student loans offering the option of deferring interest, unpaid interest is capitalized at the end of the in-school deferment or sometimes after an additional six-month grace period.
Example: John makes no payments on his $5,500 loan during his four years in college nor during his six-month grace period after graduation. At the end of his grace period, about $1,500 in unpaid interest would be added to make a new loan balance of approximately $7,000. As he begins to pay down principal (i.e., the outstanding loan balance), interest would then be calculated on the new loan balance each month.
Set a realistic goal for in-school payments
Now that you know how much interest is building up each month, set a goal for paying some or all of the interest even while in school. You can even make larger payments to pay down the principal and reduce the amount of interest accruing.
Example: John decides not to wait until graduation to start paying on his student loan. He sets up an automatic payment from his bank to pay the $31 of accruing interest each month while he goes to school and during his six-month grace period. When it’s time to begin repayment after graduation, his loan balance is $5,500, lower than the $7,000 it would have been if he had let the interest build up. See how much John saves in overall loan costs by entering this example in Sallie Mae’s repayment calculator.
|Monthly in-School Interest Payment:
|Amount Owed at Graduation if Interest Paid in School:
|Amount Owed at Graduation if Interest Not Paid in School:
All federal student loans and private student loans, including those offered by Sallie Mae, let you pay off some or all of your loan without penalty before payment is due.
Claim the tax benefits of paying on your student loans
You may qualify for tax benefits. Up to $2,500 in interest paid on student loans may be deductible on your federal income tax return. The additional refund could be used to prepay a portion of your loan to lower the cost of your loan even further. There are income limitations so be sure to check with a tax professional or refer to IRS Publication 970 for details.
**Upromise Loan Link: To view whether a student loan is eligible to participate in the Upromise Loan Link program, please visit Upromise.com/LoanLink.