Many private student loans give you the option of deferring payments until after graduation. It may seem easier not to think about your loan until you're out of school. But in reality, it may be worthwhile to make regular payments while you're in school so you can graduate with less debt.
In fact, the more you can pay while you're in school, the less you'll have to pay after you graduate.
How loan interest grows
On most student loans, interest begins to “accrue,” or grow, the day the loan funds are received at your school. When you defer making payments while in school, your loan's interest continues to build up each day. If you don’t pay the interest on your private student loan as it accrues, the unpaid interest is “capitalized” — added to the principal (the amount you borrowed), typically six months after you graduate or leave school. The capitalized interest then accrues interest just like the original principal amount. Check your loan’s promissory note for more on when interest capitalizes on a particular loan.
That’s why it’s a good idea to make full interest payments on your loan while you’re in school if you can. You’ll avoid capitalized interest and graduate owing just what you borrowed — not more.
Reduce your loan’s cost by making in-school payments
For example, here are two common in-school repayment options:
1. Pay all of the interest as it accrues while you’re in school. This allows you to:
- Reduce your total loan cost by avoiding capitalized interest
- Pay off your loan faster than if you defer payments until after graduation
- Potentially receive a lower interest rate than if you were deferring payments
2. Pay at least some of the interest — such as a $25 per month payment plan — while you're in school. This allows you to:
- Reduce the amount of interest that is capitalized – even a small payment helps
- Potentially get a lower interest rate than if you choose to defer payments altogether
Choose the best in-school repayment option for you
There's no standard answer to what kind of repayment option is best. Selecting the best repayment option depends on what you can afford and the options that your lender offers.
Be sure to calculate what your monthly student loan payment will be under different repayment options. Plus, try to pay as much as is practical in terms of your income, situation, and future prospects. The earlier you can start paying down your student loan, the less you'll have to pay in the long run.