If you fish around on the Federal Student Aid (FSA) website for information on when to start repaying your student loans, you might come away with the wrong impression.
The FSA dutifully informs you that you don’t have to begin repayment until after you leave school (or become a part-time student), and that you can in fact wait further until you exhaust your post-graduation grace period.
But just because you don’t “have to” doesn’t mean it’s in your best interest to delay.
Delaying repayment increases your debt
The information on the FSA site might lead you to believe you don’t need to act until your assigned loan servicer provides you with a repayment schedule that includes your start date.
However, if you follow the norm and defer your payments until after leaving school, you’ll face a much larger balance than what you originally borrowed.
Say you take out $7,000 worth of direct unsubsidized loans per year for four years and agree to repay the total of $28,000 at 5.05% interest rate over a standard, 10-year term. After accounting for interest, you would owe in excess of $32,000 when your grace period expired, according to our loan deferment calculator — more than $4,000 above what you originally received.
|Year in school||Original loan amount||Months of interest (including six-month grace period)||Balance after grace period|
You might think that ignoring unnecessary student loan payments would give you the peace of mind to enjoy college. That $4,241 worth of accrued interest, for example, might seem like a worthy price to pay.
Consider, however, that you could avoid that multi-thousand-dollar bombshell with paltry in-school payments in small increments. With a 5.05% rate, just $29.46 per month would keep your debt from growing while you’re studying.
To scrounge $30 a month, you might only need to make small sacrifices, such as forgoing a dinner out with friends or a new pair of jeans.
Note that this could even be a valuable strategy for need-based direct subsidized loans (which don’t accrue interest until your grace period expires). Although your balance wouldn’t grow while you’re in school, you could still make headway against your debt by sending loose change to your loan servicer.
Unfortunately, however, the benefits and processes of making in-school payments are nowhere to be found on the FSA website.
The same goes for private student loans
The FSA notes on its website that private student loan lenders could require you to make in-school payments, though this is actually a little misleading.
The truth is that the vast majority of reputable private student loan companies — a group that includes traditional banks and credit unions, as well as online lenders — offer in-school deferment and a federal loan-like grace period of six months.
Unlike the FSA, however, these lenders encourage borrowers to begin repaying their loans before graduating. College Avenue, for example, is among companies offering borrowers four different in-school repayment options:
- Full: Make principal-and-interest payments for the greatest possible savings
- Interest-only: Cover the interest to ensure you graduate with the same balance you borrowed
- Flat: Submit $25 payments to cover (part of) your interest charges and potentially eat into your balance
- Deferred: Hold off on making payments in exchange for racking up some interest to repay later.
Competing lender Sallie Mae, which offers three in-school repayment options, claims that its freshman borrowers who make interest-only payments cut their loan cost by 29%.
Look at in-school payments as a practice run for the real world
Once you understand how student loan interest works, you might be more motivated to get ahead of your education debt repayment.
Consider, too, that it’s easier to get started while you’re living in the bubble of college. As a student, you probably have fewer living expenses than you will once you graduate.
To prepare yourself for postgraduate life, you could view in-school repayment as a practice run. Create your first budget, set aside enough money to cover at least your loans’ interest and track your progress.
If you’re anything like your peers, you’re probably short on cash. However, there are plenty of ways to increase your income (such as starting a side hustle) or decrease your current expenses (like cutting the cable cord).
If you’re still short of what you need, you could explain your goals of graduating “debt interest-free” to your parents or other family members to see if they’d be willing to throw you a few extra bucks.
You decide when your repayment begins
There’s a big difference between when payments become due and when it’s wise to start submitting them.
If you decide to hold off on making payments until after hearing from your loan servicer, make that decision because it’s what’s best for you — not because it’s a blanket recommendation or because your classmates blindly follow it.
At least run the numbers to see how much interest you’d be kicking down the road. Then you can accurately gauge whether it’s worth deferring or getting a jump-start with smallish payments. (This exercise is equally useful if you’re considering student loan deferment as a college graduate.)
Either way, pay attention to loan entrance counseling when you borrow from the federal government, and keep communication lines open with private lenders, too. If you aren’t aware of all your options, you’ll likely end up following the crowd — even if it’s not the best route for your own situation.
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|1 Important Disclosures for Ascent.
Before taking out private student loans, you should explore and compare all financial aid alternatives, including grants, scholarships, and federal student loans and consider your future monthly payments and income. Applying with a cosigner may improve your chance of getting approved and could help you qualify for a lower interest rate. Ascent Student Loans may be funded by Richland State Bank (RSB). Ascent Student Loan products are subject to credit qualification, completion of a loan application, verification of application information and certification of loan amount by a participating school. Loan products may not be available in certain jurisdictions, and certain restrictions, limitations; and terms and conditions may apply. Ascent is a federally registered trademark of Turnstile Capital Management (TCM) and may be used by RSB under limited license. Richland State Bank is a federally registered service mark of Richland State Bank.
* Application times vary depending on the applicants ability to supply the necessary information for submission.
2 Important Disclosures for College Ave.
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
Information advertised valid as of 4/1/2019. Variable interest rates may increase after consummation.
3 Important Disclosures for Discover.
* The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of Smart Option Student Loan customers.
4 = Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
5 Important Disclosures for SunTrust.
Before applying for a private student loan, SunTrust recommends comparing all financial aid alternatives including grants, scholarships, and both federal and private student loans. To view and compare the available features of SunTrust private student loans, visit https://www.suntrust.com/loans/student-loans/private.
Certain restrictions and limitations may apply. SunTrust Bank reserves the right to change or discontinue this loan program without notice. Availability of all loan programs is subject to approval under the SunTrust credit policy and other criteria and may not be available in certain jurisdictions.
SunTrust Bank, Member FDIC. ©2019 SunTrust Banks, Inc. SUNTRUST, the SunTrust logo and Custom Choice Loan are trademarks of SunTrust Banks, Inc. All rights reserved.
6 Important Disclosures for LendKey.
Additional terms and conditions apply. For more details see LendKey
7 Important Disclosures for CommonBond.
A government loan is made according to rules set by the U.S. Department of Education. Government loans have fixed interest rates, meaning that the interest rate on a government loan will never go up or down.
Government loans also permit borrowers in financial trouble to use certain options, such as income-based repayment, which may help some borrowers. Depending on the type of loan that you have, the government may discharge your loan if you die or become permanently disabled.
Depending on what type of government loan that you have, you may be eligible for loan forgiveness in exchange for performing certain types of public service. If you are an active-duty service member and you obtained your government loan before you were called to active duty, you are entitled to interest rate and repayment benefits for your loan.
A private student loan is not a government loan and is not regulated by the Department of Education. A private student loan is instead regulated like other consumer loans under both state and federal law and by the terms of the promissory note with your lender.
If your private student loan has a fixed interest rate, then that rate will never go up or down. If your private student loan has a variable interest rate, then that rate will vary depending on an index rate disclosed in your application. If the interest rate on the new private student loan is less than the interest rate on your government loans, your payments will be less if you refinance.
If you don’t pay a private student loan as agreed, the lender can refer your loan to a collection agency or sue you for the unpaid amount.
Remember also that like government loans, most private loans cannot be discharged if you file bankruptcy unless you can demonstrate that repayment of the loan would cause you an undue hardship. In most bankruptcy courts, proving undue hardship is very difficult for most borrowers.
8 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|4.24% – 13.24%1||Undergraduate and Graduate|
|4.07% – 11.32%2||Undergraduate, Graduate, and Parents|
|4.84% – 13.49%3||Undergraduate and Graduate|
|4.50% – 11.35%*,4||Undergraduate and Graduate|
|4.25% – 13.25%5||Undergraduate and Graduate|
|6.08% – 7.22%6||Undergraduate and Graduate|
|3.95% – 9.81%7||Undergraduate, Graduate, and Parents|
|4.45% – 12.42%8||Undergraduate, Graduate, and Parents|