Can You Start Paying Off Student Loans While in School?

Student loans are a common financial tool for many individuals pursuing higher education. Many mistakenly believe payments cannot be made until after graduation. However, it is possible to begin paying down student loans even while actively pursuing a degree, which offers various financial advantages.

Understanding Student Loan Interest During School

Student loan interest begins accruing from the day loan funds are disbursed, with mechanics varying by loan type. Federal Direct Loans, for example, are “daily interest” loans, meaning interest accumulates each day on the unpaid principal balance. The type of federal loan significantly impacts how interest accrues during enrollment.

Direct Subsidized Loans are designed for undergraduate students who demonstrate financial need. The U.S. government pays the interest that accrues while you are in school at least half-time, during your grace period, and during periods of deferment. This means the loan balance for subsidized loans does not increase due to interest during these periods.

In contrast, Direct Unsubsidized Loans are available to both undergraduate and graduate students, regardless of financial need. For unsubsidized loans, you are responsible for all interest that accrues, even while in school, during your grace period, and during any periods of deferment or forbearance. If this interest is not paid, it can lead to interest capitalization.

Interest capitalization occurs when unpaid, accumulated interest is added to your loan’s principal balance. This increases the total amount owed, as future interest is calculated on this larger principal. Capitalization typically happens when you enter repayment after leaving school, or after a period of deferment for unsubsidized loans. Paying interest before it capitalizes can prevent this increase in your principal balance and reduce the overall cost of your loan.

Financial Impact of In-School Payments

Making payments on student loans while enrolled in school offers substantial financial benefits over the loan’s life. This is primarily due to how interest accrues, particularly on unsubsidized loans where interest begins accumulating immediately. Even small payments can reduce the amount of interest that capitalizes, meaning less interest is added to your principal balance.

Reducing the principal balance directly impacts the total interest paid because interest is calculated as a percentage of that balance. A smaller principal means less interest accrues daily, translating into lower overall costs. Paying down accruing interest while in school ensures your starting principal balance is lower when repayment officially begins.

The long-term effects of in-school payments include a shorter repayment timeline and lower monthly payments after graduation. Reducing the principal balance early decreases the total amount on which interest will be charged over the repayment period. This can lead to thousands in savings over the typical 10-year repayment plan and lower required monthly payments.

Navigating In-School Payments

Making payments on your student loans while in school involves a few practical steps. First, identify your loan servicer, the company that handles your loan billing. For federal student loans, find your servicer by logging into your StudentAid.gov account.

Once you know your loan servicer, contact them directly to inquire about making in-school payments. Servicers provide specific instructions on how to submit payments and clarify how these payments will be applied. Generally, payments are applied first to any outstanding interest, then any remaining amount is applied to the principal balance. This order is advantageous, as paying down interest first helps prevent capitalization.

Various payment strategies are available, allowing you to tailor your approach to your financial capacity. You might choose to make interest-only payments, covering just the amount of interest that accrues to prevent capitalization. Alternatively, make principal-plus-interest payments, aiming to reduce the original loan amount in addition to covering the interest. Even partial payments of accruing interest can be beneficial in reducing the amount that eventually capitalizes.

Setting up payments is straightforward. Most loan servicers offer online portals for one-time or recurring payments, and you can pay by phone or mail. Many servicers also provide an auto-pay option, which may offer a small interest rate reduction. Making payments while in school does not affect your grace period, which lasts six months after you graduate or drop below half-time enrollment. This period remains intact, allowing time before required payments begin.

Important Considerations

Before making payments on student loans while in school, assess your overall financial situation. Prioritizing higher-interest debt, such as credit card balances, makes more financial sense than paying down student loans if funds are limited. Credit card interest rates are significantly higher than student loan rates, leading to faster debt accumulation.

Maintaining an adequate emergency fund should take precedence over accelerating student loan payments. An emergency fund, typically three to six months of living expenses, provides a financial safety net for unexpected events like medical emergencies or job loss. Depleting such a fund to make early loan payments could leave you vulnerable.

Budgeting plays a central role in determining the affordability of in-school payments. Analyzing income and expenses helps determine disposable income for optional loan payments without compromising essential needs. While beneficial, early payments should not come at the expense of necessary living expenses or other financial goals. The flexibility to stop making in-school payments if your financial circumstances change is an option.