Managing student loans during college isn’t something students or their parents generally want to think about. Most students probably don’t plan to address their loans until after graduation. However, those who do may focus on the six-month grace period after graduation. This is the period before any payments are due.
This is a big mistake. If you borrow money for college, you’ll likely accumulate multiple student loans as you earn your degree. You might have one federal loan for each year you’re in school, plus private loans to cover any shortfall.
How you manage these loans while you’re still in school can determine whether you experience your student loan crisis after graduation or if you stride into adult life with your loans under control and a plan to repay the balance quickly. That’s why we’re sharing this information about how to manage your student debt during college. Keep reading to see how much you could save by addressing your debt even before graduating.
Key Takeaways
- You can manage your student loan debt during college, but a crisis after college may change your situation.
- Consider the implications of borrowing and/or agreeing to a loan whose value is more than you need.
- Unless you only have subsidized federal student loans, your balance will start accruing interest as soon as you receive the funds.
- Calculating how much interest your student loans will accrue can help you decide whether to make interest payments during school.
- Most federal loans come with a grace period after graduation, usually six months.
Overborrowing: Just Say No
Believe it or not, lenders may offer you more money than you need to pay for school. Yes, they’re increasing their risk of not getting paid back by potentially allowing you to overextend yourself, but they’re also increasing their potential profits by having you pay them more interest.
Student loans are so hard to discharge in bankruptcy and can be collected in so many ways (like withholding your tax refund and garnishing your wages) that you should assume lenders don’t have your best interests at heart. That said, it’s your job to figure out the smallest amount you need to borrow to earn your degree.
“You always have the option to turn down additional loans or even reduce the amount for which you are approved,” says Josh Simpson, vice president of operations at Lake Advisory Group. He says that the strategy of only borrowing what you need may seem obvious, but it is often overlooked.
Student Loan Interest: Does It Accumulate During School?
First, figure out whether your student loans accrue interest while you’re in school or if interest doesn’t accrue until after graduation. This depends on the type of loan(s) you have.
| Will Your Student Loan Accumulate Interest During School? | |
|---|---|
| Loan type | Interest accumulated through school? |
| Subsidized Federal Direct Loan | No, provided you’re enrolled at least half time |
| Unsubsidized Federal Direct Loan | Yes |
| Private Loan | Yes |
Source: Federal Student Aid
Next, determine how much interest your loans will accumulate while you’re in school. Otherwise, you could be shocked when you see how much more you owe compared to what you borrowed when the repayment period begins.
Use a student loan deferment calculator to do the math. Deferment occurs when you aren’t required to make payments but your student loans accumulate interest.
| Unsubsidized Federal Direct Student Loans: Interest Accumulation During School | |||||
|---|---|---|---|---|---|
| Loan year | Principal borrowed (federal maximum) | Interest rate (set by govt.) | Years (months) of school remaining | Total interest accumulated during school | Total interest with six-month post-school grace period |
| Freshman year, 2016–17 | $5,500 | 3.76% | 4 (48) | $827 | $930 |
| Sophomore year, 2017–18 | $6,500 | 4.45% | 3 (36) | $867 | $1,012 |
| Junior year, 2018–19 | $7,500 | 5.05% | 2 (24) | $757 | $947 |
| Senior year, 2019–20 | $7,500 | 4.53% | 1 (12) | $339 | $509 |
| Total principal | $27,000 | ||||
| Total interest | $2,790 | $3,398 | |||
| Grand total (principal plus interest) | $29,790 | $30,398 | |||
Source: Federal Student Aid Office
You can do the math for your own loans by looking up the federal student loan limits, along with current and past interest rates at the Federal Student Aid website.
Federal Student Loan Fees
When you are approved for a direct federal loan, you may be surprised to learn that you won’t receive the full amount. The reason is that you must pay a loan fee of 1.057% for Direct Subsidized and Direct Unsubsidized loans and 4.228% for Direct PLUS loans issued between Oct. 1, 2020, and Oct. 1, 2022, which is taken out of the principal balance of your loan; however, you still have to pay interest on the full principal even though you don’t actually get that amount.
For example, someone with a $7,500 loan and a 1.057% loan origination fee ($79.28) receives $7,420.72. But they are still responsible to pay the full $7,500 when it comes time for repayment.
The federal government took measures to protect certain student loan borrowers because of the COVID-19 pandemic. Loan repayment and collection activity were paused for all eligible loans through Dec. 31, 2022. Interest for these loans was also set at 0% during this time.
Student Loan Grace Period
Your student loans enter the repayment period after you drop below half-time enrollment for any reason, including graduation. But you often get a six-month grace period during which things continue as they did during school: Interest still accumulates, but you won’t have to make payments yet.
Paying Student Loan Interest During College: Is It Worth It?
Is it really such a big deal if you accumulate $2,790 or even $3,398 in student loan interest during school? That’s a personal question only you can answer. But here are some factors to consider if you are thinking about starting to pay during school versus paying after graduation.
In-School Considerations
- Calculate how much net income you need to earn per month to pay your student loan interest. How many hours will it take you to earn that money?
- Perhaps your parents are willing to pay your student loan interest while you’re in school. Could you sweeten the deal by asking them to pay it as long as you maintain a certain GPA?
- If your classes and studies are all-consuming, focusing on academics may be more valuable than paying down interest.
- If you’re taking extra classes to graduate early, you’re already looking at a semester or a year of savings on tuition and fees. If working to pay interest during school will keep you from meeting that goal, it’s definitely not worth it.
Post-Graduation Considerations
- If your first job out of school is likely to pay handsomely, the accumulated interest may be so easy to knock out post-graduation that it’s not worth worrying about during school.
- If you have no clear career path, minimizing your borrowing costs might be a priority.
- Working during school can have benefits beyond allowing you to repay student loan interest. You might build your resume, make friends, network, learn new skills, and improve your time-management skills.
How Private Student Loans Change the Interest Payment Picture
Let’s say the federal student loan limits don’t fully cover your tuition and fee shortfall after grants, scholarships, and parental contributions. What does the math look like with larger loan amounts and private loan interest rates? We’ll assume you’ll need to borrow $15,000 per year and you’ll max out your federal loans. That leaves $7,500 to $9,500 per year in private loans.
| Private Student Loan Interest Accumulation During School | |||||
|---|---|---|---|---|---|
| Loan year | Principal borrowed | Interest rate | Years (months) of school remaining | Total interest accumulated during school | Total interest with six-month post-school grace period |
| Freshman year, 2016–17 | $9,500 | 9.0% | 4 (48) | $3,422 | $3,848 |
| Sophomore year, 2017–18 | $8,500 | 9.0% | 3 (36) | $2,295 | $2,678 |
| Junior year, 2018–19 | $7,500 | 9.0% | 2 (24) | $1,350 | $1,688 |
| Senior year, 2019–20 | $7,500 | 9.0% | 1 (12) | $675 | $1,011 |
| Total principal | $33,000 | ||||
| Total interest | $7,742 | $9,225 | |||
| Grand total: (principal plus interest) | $40,742 | $42,225 | |||
Private student loan interest rates depend on many factors. This includes your credit history, your cosigner’s credit history (if you have one), market interest rates, and the lender’s offerings. You’ll also have the option of a fixed- or variable-rate loan. Remember that variable loan rates often start out lower than fixed rates but can escalate over time.
For simplicity, we chose a 9.0% fixed interest rate for our private student loan example in the table above. Private lenders are not required to offer a grace period, but many do, so we showed that option as well.
The more you borrow and the higher the interest rate, the more you may gain by paying interest during school. And it doesn’t have to be an all-or-nothing deal. Paying some interest will do you more good than paying no interest. If you’re able to pay the interest, have some spending money to do fun things with friends, and still have money left over, you might even consider paying down your student loan principal during school.
Special Considerations
Student loan borrowers should be aware that President Joe Biden and his administration have proposed numerous policies that address the student loan crisis. One such provision, included in the American Rescue Plan Act of 2021, makes all student loan forgiveness completely tax-free from Jan. 1, 2021, to Dec. 31, 2025.
The White House also announced debt cancellation of up to $20,000 for recipients of Pell Grants from the Department of Education. Borrowers of non-Pell Grants may also qualify for debt relief of up to $10,000. Debt cancellation applies to both graduates and current students. The plan also includes reforming the student loan system and working with schools to keep college tuition affordable.
What’s the First Rule Regarding Student Loan Payback While in College?
Knowing how interest accumulates on your loan is critical. Is it suspended or deferred while you are a student, or does it accumulate regardless of status? Interest on private and unsubsidized federal direct loans continues to accumulate while you’re in school, while subsidized federal direct loans don’t.
What About the Grace Period?
You must begin paying back student loans once you’re enrolled in less than half of the courses expected of a full-time student. Still, a six-month grace period is often available. During this time things continue as they did during school: Interest accumulates, but you won’t have to make payments.
Should I Begin Paying My Student Loan Interest During School?
The answer isn’t a simple yes or no. Are you able to work while going to school? Are your parents able to pay the interest? If working to pay interest during school will keep you from meeting your educational goals, paying the interest may not be worth it.
The Bottom Line
By calculating how much student loan interest you will accrue during school, you’ll have the information you need to make an important decision. Should I make student loan interest payments during college? There’s no correct answer. But it is an analysis every student, perhaps with some help from their parents, needs to perform for themselves.
By doing this analysis ahead of time, making the choice, and understanding your borrowing circumstances, you’ll be well prepared to pay off your remaining debt after graduation. And you won’t be hit with any unwelcome surprises after you receive your diploma.