How Can You Reduce Your Total Loan Cost While in School?

The cost of higher education in the United States has increased significantly, making student loan debt a considerable financial burden. Proactively managing and reducing loan costs from the start of an academic journey can mitigate the long-term financial impact.

Minimizing the Amount Borrowed

Reducing the overall amount borrowed is the most direct way to lower total loan costs. Students can begin by maximizing “free money” sources, which do not require repayment. Scholarships (merit-based) and grants (need-based) directly decrease the amount a student needs to finance. Sources like Pell Grants are federal grants designed to help undergraduate students with significant financial need, with the maximum award for the 2024-2025 academic year being $7,395. Students should diligently search for and apply to as many scholarships and grants as possible, submitting the Free Application for Federal Student Aid (FAFSA) early each year to determine eligibility for federal and institutional aid.

Beyond grants and scholarships, students can implement various strategies to reduce their living and tuition expenses while enrolled. Living at home, if feasible, significantly cuts housing costs, a substantial portion of college expenses. Opting for a more affordable meal plan, utilizing public transportation instead of owning a car, and purchasing used textbooks are additional practical steps to minimize out-of-pocket spending. Some students find that starting their academic career at a community college for initial credits, then transferring to a four-year institution, can provide a more cost-effective pathway to a degree.

Working part-time while in school can also contribute to reducing borrowing needs. Even a modest income can cover immediate educational or living expenses, thereby decreasing reliance on loans. Developing and adhering to a personal budget is fundamental to effective financial management during college. This allows students to track income and expenses, make informed spending decisions, and identify areas where costs can be further reduced.

Strategic Loan Choices

If borrowing becomes necessary, understanding the different types of loans and prioritizing them strategically can significantly impact the total cost. Federal student loans, offered by the U.S. Department of Education, generally provide more favorable terms and borrower protections compared to private student loans. These advantages include fixed interest rates and flexible repayment options like income-driven plans. Federal loans also offer deferment and forbearance, allowing temporary postponement of payments.

A key distinction among federal loans lies between Direct Subsidized and Direct Unsubsidized Loans. Direct Subsidized Loans are available to undergraduate students who demonstrate financial need. The U.S. Department of Education pays the interest on these loans while the student is enrolled in school at least half-time, during the six-month grace period after leaving school, and during periods of deferment. This means interest does not accrue during these periods, which can lead to a lower total repayment amount.

Conversely, Direct Unsubsidized Loans are available to both undergraduate and graduate students, regardless of financial need. Interest begins to accrue on these loans from the moment the funds are disbursed, even while the student is still in school. If this interest is not paid while it accrues, it can capitalize, meaning it is added to the principal balance, increasing the total amount on which future interest is calculated. Private student loans, offered by banks, typically have variable interest rates and stricter repayment terms. They also lack comprehensive federal protections, making them a less desirable option and usually considered only after exhausting all federal loan eligibility.

Paying Interest While in School

Paying interest on student loans while still enrolled can be a highly effective strategy for reducing the total loan cost, particularly for unsubsidized federal loans and private loans. The concept of interest capitalization is central to this strategy. Interest capitalization occurs when accrued but unpaid interest is added to the loan’s principal balance. This increases the total amount owed, and subsequent interest is then calculated on this new, larger principal. For instance, if a loan’s principal is $10,000 with a 6.8% interest rate, and $340 in interest accrues and capitalizes, the new principal becomes $10,340, leading to more interest accumulating daily.

Making even small, consistent interest payments while in school prevents this capitalization. This prevents interest from being added to the principal, and the borrower avoids paying interest on interest. This proactive approach can result in significant savings over the life of the loan. Students can contact their loan servicer directly to inquire about their accrued interest amount and set up payments specifically for the interest portion of their loan.

Even if a student has limited income while attending classes, any payment towards the accruing interest can be beneficial. It reduces the amount that will eventually capitalize, thereby lowering the total cost of repayment. This method is applicable for Direct Unsubsidized Loans, where interest begins accruing immediately, and for private loans, which also typically accrue interest from disbursement.