Have a little wiggle room in your budget this semester? Consider making some payments toward your student loan interest.
I know that your budget is probably tight, and each dollar you earn from a part-time job or cash that you get in all those birthday cards is probably being maximized. But this is an idea that could really pay off. Here's why...
When you graduate or leave school and enter repayment the interest that has accrued on your loans is usually capitalized. Essentially that means it's added to the principal balance of your loan and it starts being charged interest of its own.
If you can reduce that interest amount that you're accruing while you're in school it means paying less over the life of your loan.
Say you borrow $5,000 at a fixed 8% APR each year you are in school. Those loans would accrue about $200 in interest each year.
So each year a new $5,000 loan accrues another $200. After four years of borrowing, the loans would've accumulated $2,000 in interest charges ($800 for freshman year's loan, $600 for sophomore year's loan, $400 for junior year's loan, and $200 for senior year's loan).
Add that interest to the principal balance for repayment and you're looking at $22,000. If you paid the accruing interest while you're in school, your repayment balance would be $20,000.
And here's what the repayment of those two scenarios looks like over a 10 year repayment term:
| Repayment amount | $22,000 | $20,000 |
| Monthly payment | $266.92 | $242.66 |
| Total interest | $10,030.48 | $9,118.62 |
| Total amount repaid | $32,030.48 | $29,118.62 |
(P.S. I got those numbers using this calculator, if you want to run your own situation.)
That's quite a bit saved over time, wouldn't you say? I know I could use a couple thousand spare dollars!
Is paying interest during school something you'd consider?
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