Aspiration & Struggle

The Importance of Making Interest-Only Student Loan Payments

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Hooray, you graduated. Congrats! Take a moment to celebrate before reality sets in and you launch into the often overwhelming and slightly terrifying topic of dealing with your student loan debt. Finished with your happy dance? Good. Now you’re ready to get down to business.

Where to Begin

Considering you’re happily nestled in the grace period phase with federal student loans and some private lenders, you may be thinking that other issues are far more pressing. But did you know that interest is still accruing on most of those loans? Don’t freak out. You can actually make interest-only payments on your loans anytime want. (Note that federal subsidized Stafford loans and Perkins loans will typically not accrue interest during the grace period.)

The class of 2015 boasts the most indebted graduates in decades (possibly ever) with an average of $35,000, according to the Wall Street Journal. And, right now, the majority of your compatriots aren’t thinking about paying off their debt until around November when the six-month grace period ends. Regardless of those facts, you can make the smart play and get a head start on your payments, which will save your future self both time and money.

What Happens When Interest Accrues on Your Loans?

When you signed up for a student loan, you also agreed to an interest rate with your lender. Subsidized student loans typically don’t accrue interest because the Department of Education pays the interest while you’re in school and during your grace period, but always check your loan’s fine print to see if that’s the case with you.

Those with unsubsidized student loans or who borrow from private lenders will accrue interest on their loans throughout school and the six-month grace period. At the end of your grace period, the accrued interest capitalizes, which means it’s added to your principal balance (the original sum you borrowed). This, in turn, results in you paying even more interest over the life of the loan.

How to Decrease the Interest You’re Paying

There is a simple way to reduce the amount you’ll pay in interest over the life of the loan. Instead of taking a six-month vacation from paying off your loans, you can make interest-only student loan payments to negate the accruing interest. Therefore, it won’t capitalize on your principal balance.

If your loan doesn’t accrue interest, there’s an even more compelling reason to make payments during your grace period: Any payment you make pays down the principal balance! That’s a huge win because you’ll knock off some of the amount owed, meaning you’ll have a smaller debt on which to pay interest once your loan comes out of the grace period.

For Current College Students

You don’t have to wait until graduation to start making student loan payments. You can begin chipping away at both the loans and the interest as soon as you scrape some money together. If you’re working through school and have a little money to spare each month, then you should strongly consider making monthly payments (or at least interest-only payments) toward your student loans. You’ll decrease the principal balance and save yourself a good chunk of money in the long run.

One Last Thing to Remember

Your lender will give you a minimum due each month. You are more than welcome to pay more than the minimum to start digging yourself out of debt faster, but some lenders are sneaky and apply the extra money to future interest. You can prevent this from happening by simply telling your lender to apply all extra funds to the principal balance.

Knocking down the principal balance in any way will help you pay off your debt faster, and this of course means paying less money in interest! So do the savvy thing and save yourself some cash. You in 10 years will be really happy you did.