For many college students, borrowing student loans means
they’ll be paying back principal and interest. According to the College Board,
in 2012-2013 alone, more than 7 million students took out federal unsubsidized
Stafford loans, a type of loan where the borrower is responsible for all
accrued interest.
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Interest starts to accrue on unsubsidized Stafford loans
from the time they’re first disbursed. At the end of the grace period, the six
months between the time a student leaves school and the first payment, the
accrued interest is capitalized. This means it’s added to the principal balance
and interest then starts to accrue on the new, larger balance.
Unsubsidized loan payments can be deferred until the
borrower graduates or his or her course load drops below half-time, and most
students choose to skip making payments while in school. But the Student Loan
Ranger thinks students should still try to squeeze a loan payment into their
limited budget – by paying just the loans’ interest. There are three reasons
why.
1. You will save money: Let’s say you attended a one-year
vocational program and took out a federal unsubsidized Stafford loan for $5,000
at a 3.9 percent interest rate. According to the Cost of Interest
Capitalization Calculator over at FinAid.org, if you deferred principal and
interest for 18 months, which equals the time you were in school plus the
six-month grace period, the new loan balance would be $5,300.72 with accrued
interest.
With the interest capitalization, under the standard
120-payment plan, after you got out of school you would pay $53.42 monthly, for
a total payment of $6,410.40
If you instead opted to make interest-only payments while
you were in school and during the grace period, you’d pay $16.25 a month over
18 months for a total of $292.50. Then, when your regular payments of principal
and interest kicked in, your monthly payment would be $50.39 for 10 years, for
a total of $6,046.80.
Combined with the $292 you already paid in interest, that
means the total amount paid back would be approximately $6,339, or about $71
less than you would pay if you allowed the interest to capitalize.
2. You will develop good habits: Often, borrowers fall
behind in their student loan payments because they miss the first one due after
their grace period ends. Delinquency can increase the amount you owe through
late fees – although most federal student loans currently don’t charge late
fees, federal regulations do authorize up to 6 cents for each dollar of each
installment past 15 days late.
Delinquency is also the first step toward default. However,
if you align your interest-only payments with what will be your regular due
date, you’ll get in the habit of parting with some money at that time.
In addition, you’ll already have a dedicated line in your
budget for your student loan payments. You’ll likely have to increase that
amount once your payments actually come due, however you won’t bust your budget
with a student loan surprise. You’ll know that amount is coming, and you’ll
hopefully plan for it by increasing your payments or decreasing your other
expenses in advance.
As a bonus, you can also get a head start on automating your
payments. Automatic debit is a great option for keeping your loan payments on
track.
In addition, some lenders will even decrease your interest
rate for choosing this option. You just need to remember to update the amount
you pay each month once your grace period ends; the rest will take care of
itself.
3. You will feel great: If you’re a student, you may feel
like there’s not a lot you can control in your life. You can stop your study loan from
feeding into that.
You can take control of your debt in many different ways,
like choosing a repayment schedule that works for you. Making early payments
and chipping away at that debt is another way to take charge of your money and
feel like you can conquer everything the real world will throw at you after
graduation.
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