Can You Start Paying Student Loans While Still in School?

Many people assume student loan payments only begin after graduation. While deferment is a standard feature for many student loans while enrolled, making payments during your studies is often a viable option. This article explores the benefits and practicalities of starting student loan repayment early.

Understanding Loan Status While Enrolled

When you are enrolled in school at least half-time, federal student loans typically enter an “in-school deferment” period, meaning payments are not required. This deferment pauses the repayment clock until you graduate, leave school, or drop below half-time enrollment. However, the impact on interest accrual varies significantly between different federal loan types.

Direct Subsidized Loans do not accrue interest while you are in school, during the grace period, or during deferment. Direct Unsubsidized Loans accrue interest from disbursement. This means the total amount owed on unsubsidized loans grows even without payments.

Most federal student loans enter a grace period, typically lasting six months, after you graduate or drop below half-time enrollment. During this period, payments are not required, but interest may still accrue, particularly for unsubsidized loans. Unpaid interest accumulating during deferment or the grace period on unsubsidized loans can be added to your principal balance through capitalization. This increases the total amount on which future interest is calculated, raising the overall loan cost.

Private student loans operate under different terms than federal loans. While some private lenders offer in-school deferment, others may require immediate interest-only or full payments while you are still enrolled. Review the specific terms of any private loan, as their interest rates can be variable and generally lack federal loan borrower protections.

Advantages of Making Payments While in School

Making payments on student loans while still enrolled offers several financial advantages. The most significant benefit is reducing the total interest paid over the loan’s lifetime. Paying down the principal balance earlier decreases the base upon which interest is calculated, leading to substantial savings.

Even small, consistent payments can make a difference due to compounding interest. Each payment chips away at the principal, meaning less interest accrues daily. This proactive approach can shorten the overall repayment period, allowing you to become debt-free sooner.

Beyond financial savings, making early payments can provide a psychological benefit. Taking control of your debt while in school can reduce future financial stress and foster a sense of accomplishment. This proactive financial management can also improve your debt-to-income ratio, a factor lenders consider for future credit applications like mortgages.

How to Make Payments While Enrolled

Initiating payments on your student loans while still in school involves a few practical steps. First, identify your loan servicer. For federal loans, you can typically find this information on your student aid dashboard.

Once you know your servicer, contact them through their online portal, by phone, or via mail to set up payments. When making extra payments, clearly instruct your servicer to apply the additional funds directly to the principal balance. Without specific instructions, extra payments might be applied to future interest or advance your due date, rather than reducing the principal and saving money.

Several payment methods are available, including one-time payments, recurring payments, or auto-debit. Many federal loan servicers offer a small interest rate reduction, typically 0.25%, for borrowers who sign up for automatic payments. Regularly checking your loan statements online is important to ensure payments are applied according to your instructions.

Important Financial Considerations

Before committing to early student loan payments, evaluate your overall financial situation. Prioritizing other financial goals, such as building an emergency fund, is generally recommended. Financial experts suggest having three to six months of living expenses saved in an easily accessible account to cover unforeseen events. Using available funds for an emergency fund can prevent the need for high-interest debt, like credit cards, in a crisis.

Consider the concept of opportunity cost, assessing whether money used for student loan payments could be better utilized elsewhere. If you have higher-interest debt, such as credit card balances, paying those off first often yields greater financial savings. Credit card interest rates are typically much higher than student loan interest rates.

Understanding your loan’s specific terms, including interest rates and whether they are federal or private, is important when deciding on early payments. While making payments on existing loans generally does not negatively affect future financial aid eligibility, borrowing less initially can impact your overall aid package. The Free Application for Federal Student Aid (FAFSA) primarily considers assets and income, not existing loan balances, when determining aid.