If you’re new to college and student loans, you’re probably feeling overwhelmed by a great many novel experiences – choosing and taking college classes, applying for and receiving federal aid and scholarships, even living away from home for the very first time. Graduation, and all that it entails, seems so far away! It’s probably the last thing on your mind.
Really, though, when it comes to student loan debt, you should be considering how you’re going to repay those loans from the very first day you take them out. Waiting until post-graduation, when those payments first become due, isn’t a smart strategy. That’s because there are things you can do now, as a borrower still in school, that will set you up down the road to save money on your loans. Managing your debt is something to think about from day one.
Subsidized vs. unsubsidized loans, and why the difference matters.
If you’ve taken out federal student loans, there’s a good chance you have a mix of subsidized and unsubsidized loans. And of course, private loans are always unsubsidized. Subsidized loans are loans you aren’t charged interest on while you’re in school because the federal government pays the interest on your behalf. Unsubsidized loans are loans that don’t have that benefit. In other words, they are accruing interest each month, and even though you don’t have to pay that interest while enrolled in school, it’s still money you’ll have to pay eventually. Not only that, but if you allow it to accrue without paying it off, by the time you graduate that interest will have been capitalized and you’ll owe even more. It’s important to understand how capitalization works in this context so you understand what a huge benefit it is to manage payment on that interest before graduation.
Every month while you’re in school, unsubsidized loans (federal and private) will accrue interest based upon the interest rate. If that interest isn’t paid off each month, it is added to the unpaid principal balance and your balance increases. Then the following month, you accrue interest again – this time, on the new, higher balance (old principal balance + accrued and unpaid interest = new principal balance). So, through the power of capitalization, your unpaid interest ends up costing you much more than your original interest rate, unless you pay off that interest as you go. Over the course of four or more years, the difference can be thousands of dollars, depending upon how much money you borrow and when.
Finding ways to pay the interest as it accumulates.
Once you realize how much it is really costing you to let that interest accumulate, the next step is to plan to pay it off. Even if you can’t pay off all of the accrued interest, every little bit will help you have a more manageable balance and manageable monthly loan payment down the road as a graduate. Consider putting money received for your birthday, holidays, and any sudden windfalls, toward your interest payments. Remember, anything you pay off now, you won’t have to pay later, and it’s cheaper to pay it while in school than to let it capitalize until graduation.
If you can, also consider working part-time while in school. There are many compelling reasons to get a part-time job before graduation. It will give you valuable experience on your resume, and might even give you an inkling of whether you love or hate the field you think you want to work in. But one of the most motivating reasons should be to manage your increasing debt load. Each semester, check your new student loan balance, and calculate what you are accruing in interest. Then, decide how much of your income you can reasonable afford to use to pay down that interest. It isn’t a smart idea to let your grades drop just to make interest payments. But many students successfully maintain a healthy balance between full-time school and part-time work. Some even say that working part-time encourages them to make the most efficient use of their study time and leads to better grades.
Looking ahead to post-graduation.
Paying the interest on your loans while in school won’t directly affect your credit score, but it will help you to keep your monthly payment lower and save you money over the life of your loans. And having a lower monthly payment upon graduation will help you to be able to make that payment, which is itself important to your credit score. Though the prospect of making payments might seem far away, those four years will pass by quicker than you expect. Most graduates face impending monthly payments with a bit of panic, because they’ve all but ignored their growing balances while in school. But, if you commit yourself to taking charge of your student debt from the very beginning, you can avoid being one of them. You may even consider looking for a job that will help you repay student debt. A number of large companies like Staples, PWC, Nvidia, and Chegg offer student loan repayment benefits. These employers will agree to contribute money towards your student loan bill, alongside your regular wages. This will mean greater and more optimistic choices for you post-graduation.