College hardly seems like the optimal time to start paying off student loans. Between taking classes, balancing internships and trying to avoid accumulating additional debt — who would bother budgeting for student loan payments? Aren’t those supposed to be paid after graduation anyway? It’s a fair stance to take — but one that could be costly. Making payments, even small ones, could help you pay off student loans faster and avoid joining the 11.3 percent of borrowers who have delinquent student loans, according to the Federal Reserve Bank of New York.
How One Student Saved Money by Paying In School
Mary Burke, 27, decided not to wait until after she crossed the stage to start paying off her student loans.
“My dad said, ‘Hey Mary — you made a lot of money this summer. Why don’t you pay back a loan?’ and so I paid off all of my freshman year loans,” said Burke, who borrowed $8,500 for her freshman year at a 6.8 percent interest rate with two unsubsidized federal student loans. The unsubsidized status meant her loans started accruing interest immediately. Subsidized loans wouldn’t have started to accumulate interest until after Burke graduated from St. Bonaventure University in 2011.
Burke earned the money to pay off those loans by working as a tutor and in the campus book store during her freshman year. She also managed a pizzeria in her hometown during the summer. Even though Burke did work the remaining three years of college and throughout the summers, she no longer continued to make payments on her student loans. Instead, the money she earned subsidized all of her lifestyle costs throughout the academic year, such as living in the dorms, meals and the occasional trip. This kept her loans at a minimum. She also used her savings to pay for a flight to Italy, accommodations and meals during a summer internship doing an archaeological dig and housing and food while doing another internship at the National Archives in Washington, D.C.
On a 10-year repayment plan, Burke would have likely been paying approximately $98 per month on her $8,500 in loans from freshman year if she had deferred payments until after graduation. She would have paid approximately $3,283 in interest on top of the $8,500 she borrowed if she only made minimum payments each month. Even though some interest accrued during Burke’s freshman year, she ultimately saved herself thousands by paying her loans off early.
What Are My Student Loan Repayment Options?
There are a variety of ways you can start making payments on your student loans. Like Burke, you could save up to pay off one or several loans before you graduate. But if this feels impossible, here are a few other options:
Unsubsidized federal student loans and private student loans begin to accrue interest from the day they are disbursed, and some lenders provide the option to pay the interest as it accrues. By making small payments each month, you could offset some (or all) of this interest before it capitalizes, a fancy term for “getting added to” your principal loan balance. Keep in mind that once your current interest capitalizes and the total loan balance is higher, then the future interest is being accrued on that higher balance.
Some lenders offer an in-school payment option where you make a fixed payment each month. For example, Discover Student Loans provides the option to make a $25 fixed monthly payment while you’re in school and during your grace period to help minimize the overall cost of your loan. This chart shows a hypothetical example of the interest that a student loan for $8,500 will accrue if no in-school payments are made, if $25 monthly in-school payments are made and if $50 monthly in-school payments are made.
Make payments when you can
Those who opt for a deferred payment plan are not required to make payments until months after they graduate or their enrollment drops below half-time. However, you can still make payments with this option. Your monthly or quarterly statements will show you just how much interest is accruing and explain how to make the optional payments while you’re still a student. This option is the most flexible because once you start making payments you do have the option to stop as there is no obligation to keep paying until your loans officially enter repayment. And don’t worry, there’s no penalty for prepaying.
You Too Can Save Money on Your Student Loans
There’s no reason to delay payments on student loans until after graduation, especially if you’re already earning money during the school year or the summer. Making seemingly small monthly payments can help you save a lot of money by reducing the amount of interest your loan accrues. Burke reflects back on working more than 40 hours a week during college and doesn’t regret it for a moment. Paying off a loan and minimizing the amount she had to borrow enabled her more freedom in her post-college life because she didn’t feel shackled to high student loan payments.