3 Reasons You Should Consider Making Loan Payments While In School

By Madison White on October 27, 2019

When it comes to student loans, people can often find themselves with unanswered questions. There are many common misconceptions about student finance that people aren’t completely prepared for when it comes to financing their degree. Some common misconceptions are that you should take out as many loans as possible and that you shouldn’t worry about paying off your loans until way after you’ve graduated. After all, that’s what everyone else does, right? Not necessarily. Having a good understanding of how loans work can help you evaluate your own student loan situation and determine if getting a head start on repayment is a good option for you. For many students, this is something that could benefit them, but that they are unaware of until well after they’ve graduated.

1. Paying off your loans helps you understand how loan financing works

Firstly, it is helpful to know the terms that apply to student loans. Two terms you are likely to see are subsidized and unsubsidized. Whether your loans are subsidized or not will depend on your initial financial situation, what specific loans you qualify for, and where you are in your financial journey. In easier terms, subsidized means that you will not begin to pay interest on the loan amount until after you graduate. Unsubsidized means the opposite, your loan will begin accruing interest as soon as it is taken out.

If you have unsubsidized loans, the amount you owe is increasing as you go through school. While you may think that interest won’t account for much, the amounts can really begin to add up. Most student loan interest rates fall between 4 and 7%. This may seem like a small number, but you have to remember that loans are often for a significant sum of money. For example, a $10,000 loan with 4.45% interest would accrue around $450 a year in interest. Nearly $500 isn’t a small sum of money at all!

2. Paying off interest helps decrease how much money you will owe

A good thing to do while in school is to begin to pay off the interest that is already accruing. Usually, monthly interest rates are a much more manageable number that you can pay off rather easily. Most student loan providers will list exactly how much interest your loan has accrued so far and you can tell what you would need to pay to bring your loan back to its original number.

Even if the interest is too much for you to pay all at once, it is still a good idea to pay off even part of the interest. Why? Interest increases the overall total of money you owe. It is calculated daily so, after each day of not paying off interest, your total is increasing, as is the interest you own on your total. For example, let’s go back to our $10,000 example. If your loan accrued $5 in interest over the first few months, you are now paying 4.45% of $10,005. The numbers continue increasing from there. Just by paying off interest while you’re in school, you can save yourself from having to pay even more in interest that has accrued over time.

3. Decreasing your total amount means you pay even less in interest

If you are fortunate enough to have subsidized loans, or can easily pay off your unsubsidized loans’ interest, you may be wondering if paying back your loans early is still a good idea. First, you must consider your overall financial situation. You should not be taking out more loans or depriving yourself of basic needs to begin paying off student loans. If this is the case, you are better off waiting until you are in a better position to pay off your loans after you graduate.

If you can afford to pay off some of your debt, then yes, it is a good idea. Similar to the ideas discussed before, you can decrease your overall total which will further decrease the amount you will need to pay later on. 4.45% interest on a $10,000 will accrue roughly $450 in interest over one year. In contrast, 4.45% interest on an $8,000 loan is around $350 after one year. While you will eventually have to pay back all of your initial loan amounts, you can really begin to save by the amount of interest you accrue overall. Decreasing your total before interest begins can help you save hundreds of dollars in the long run.

There is no one size fits all method when it comes to student loan repayment. Because everyone comes from a different background, it is difficult to prescribe proper actions. However, one of the best things you can do when it comes to student financing is to educate yourself about your options in the present and in the future.

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