Managing student loans during college isn’t something students or their parents generally want to think about. Most students probably don’t plan to address their loans until after graduation. However, those who do may focus on the six-month grace period after graduation. This is the period before any payments are due.
This is a big mistake. If you borrow money for college, you’ll likely accumulate multiple student loans as you earn your degree. You might have one federal loan for each year you’re in school, plus private loans to cover any shortfall.
How you manage these loans while you’re still in school can determine whether you experience a student loan crisis after graduation or if you stride into adult life with your loans under control and a plan to repay the balance quickly. That’s why we’re sharing this information about how to manage your student debt during college. Keep reading to see how much you could save by addressing your debt even before graduating.
Key Takeaways
- You can manage your student loan debt during college, but a crisis after college may change your situation.
- Consider the implications of borrowing or agreeing to a loan whose value is more than you need.
- Unless you only have subsidized federal student loans, your balance will start accruing interest as soon as you receive the funds.
- Calculating how much interest your student loans will accrue can help you decide whether to make interest payments during school.
- Most federal loans come with a grace period after graduation, usually six months.
Overborrowing: Just Say No
Believe it or not, lenders may offer you more money than you need to pay for school. Yes, they’re increasing their risk of not getting paid back by potentially allowing you to overextend yourself, but they’re also increasing their potential profits by having you pay them more interest.
Student loans are hard to discharge in bankruptcy and can be collected in so many ways. For federal loans, the government can withhold your tax refund and garnish your wages. For private loans, you could face lawsuits and collection agencies, among others. That said, it’s your job to figure out the smallest amount you need to borrow to earn your degree.
“You always have the option to turn down additional loans or even reduce the amount for which you are approved,” said Josh Simpson, vice president of operations at Lake Advisory Group. He said that the strategy of only borrowing what you need may seem obvious, but it is often overlooked.
Student Loan Interest: Does It Accumulate During School?
First, figure out whether your student loans accrue interest while you’re in school or if interest doesn’t accrue until after graduation. This depends on the type of loan(s) you have.
| Will Your Student Loan Accumulate Interest During School? | |
|---|---|
| Loan Type | Interest Accumulated Through School? |
| Subsidized Federal Direct Loan | No, provided you’re enrolled at least half time |
| Unsubsidized Federal Direct Loan | Yes |
| Private Loan | Yes |
Source: Federal Student Aid
Next, determine how much interest your loans will accumulate while you’re in school. Otherwise, you could be shocked when you see how much more you owe compared to what you borrowed when the repayment period begins.
Use a student loan deferment calculator to do the math. Deferment occurs when you aren’t required to make payments but your student loans accumulate interest.
| Example Of Interest Accruing on Unsubsidized Federal Student Loans | |||||
|---|---|---|---|---|---|
| Loan Year | Principal borrowed (federal maximum) | Interest rate (set by govt.) | Years (months) of school remaining | Interest accumulated | Interest with six-month grace period |
| Freshman year | $5,500 | 3.76% | 4 (48) | $827 | $930 |
| Sophomore year | $6,500 | 4.45% | 3 (36) | $867 | $1,017 |
| Junior year | $7,500 | 5.05% | 2 (24) | $757 | $947 |
| Senior year | $7,500 | 4.53% | 1 (12) | $339 | $509 |
| Total principal | $27,000 | ||||
| Total interest | $2,790 | $3,398 | |||
| Grand total (principal plus interest) | $29,790 | $30,398 | |||
You can do the math for your own loans by looking up the federal student loan limits, along with current and past interest rates at the Federal Student Aid website.
Federal Student Loan Fees
When you are approved for a direct federal loan, you may be surprised to learn that you won’t receive the full amount. The reason is that you must pay a loan fee of 1.057% for Direct Subsidized and Direct Unsubsidized loans and 4.228% for Direct PLUS loans issued between Oct. 1, 2020, and Oct. 1, 2024, which is taken out of the principal balance of your loan; however, you still have to pay interest on the full principal even though you don’t actually get that amount.
For example, someone with a $7,500 loan and a 1.057% loan origination fee ($79.28) receives $7,420.72. But they are still responsible to pay the full $7,500 when it comes time for repayment.
Federal Student Loan Forgiveness and Payment Changes
On June 30, 2023, the Supreme Court ruled that the Biden administration lacked the authority to cancel up to $20,000 in federal student debt per borrower. Shortly thereafter, the administration announced its Saving on a Valuable Education (SAVE) plan. This plan, which took effect in August 2023, cuts payments on undergraduate loans in half, reduces some borrowers’ monthly loan payments to $0, ensures that balances don’t grow as long as payments are kept up to date, and provides early forgiveness for low-balance borrowers.
Student Loan Grace Period
Your student loans enter the repayment period after you drop below half-time enrollment for any reason, including graduation. But you often get a six-month grace period during which things continue as they did during school: Interest still accumulates, but you won’t have to make payments yet.
The federal forbearance on student loan payments and interest that began in 2020 is over. Student loans began accruing interest starting on Sept. 1, 2023, and payments resumed Oct. 1, 2023.
Paying Student Loan Interest During College: Is It Worth It?
Is it really such a big deal if you accumulate $2,790 or even $3,398 in student loan interest during school? That’s a personal question only you can answer. But here are some factors to consider if you are thinking about starting to pay during school versus paying after graduation.
In-School Considerations
- Calculate how much net income you need to earn per month to pay your student loan interest. How many hours will it take you to earn that money?
- Perhaps your parents are willing to pay your student loan interest while you’re in school. Could you sweeten the deal by asking them to pay it as long as you maintain a certain GPA?
- If your classes and studies are all-consuming, focusing on academics may be more valuable than paying down interest.
- If you’re taking extra classes to graduate early, you’re already looking at a semester or a year of savings on tuition and fees. If working to pay interest during school will keep you from meeting that goal, it’s definitely not worth it.
Post-Graduation Considerations
- If your first job out of school is likely to pay handsomely, the accumulated interest may be so easy to knock out post-graduation that it’s not worth worrying about during school.
- If you have no clear career path, minimizing your borrowing costs might be a priority.
- Working during school can have benefits beyond allowing you to repay student loan interest. You might build your resume, make friends, network, learn new skills, and improve your time-management skills.
How Private Student Loans Change the Interest Payment Picture
Let’s say the federal student loan limits don’t fully cover your tuition and fee shortfall after grants, scholarships, and parental contributions. What does the math look like with larger loan amounts and private loan interest rates? We’ll assume you’ll need to borrow $15,000 per year and you’ll max out your federal loans. That leaves $7,500 to $9,500 per year in private loans.
| Private Student Loan Interest Accumulation During School | |||||
|---|---|---|---|---|---|
| Loan year | Principal borrowed | Interest rate | Years (months) of school remaining | Total interest accumulated during school | Total interest with six-month post-school grace period |
| Freshman year | $9,500 | 9.0% | 4 (48) | $3,422 | $3,848 |
| Sophomore year | $8,500 | 9.0% | 3 (36) | $2,295 | $2,678 |
| Junior year | $7,500 | 9.0% | 2 (24) | $1,350 | $1,688 |
| Senior year | $7,500 | 9.0% | 1 (12) | $675 | $1,011 |
| Total principal | $33,000 | ||||
| Total interest | $7,742 | $9,225 | |||
| Grand total: (principal plus interest) | $40,742 | $42,225 | |||
Private student loan interest rates depend on many factors. This includes your credit history, your cosigner’s credit history (if you have one), market interest rates, and the lender’s offerings. You’ll also have the option of a fixed- or variable-rate loan. Remember that variable loan rates often start out lower than fixed rates but can escalate over time.
For simplicity, we chose a 9.0% fixed interest rate for our private student loan example in the table above. Private lenders are not required to offer a grace period, but many do, so we showed that option as well.
The more you borrow and the higher the interest rate, the more you may gain by paying interest during school. And it doesn’t have to be an all-or-nothing deal. Paying some interest will do you more good than paying no interest. If you’re able to pay the interest, have some spending money to do fun things with friends, and still have money left over, you might even consider paying down your student loan principal during school.
Special Considerations
Student loan borrowers should be aware that President Biden and his administration proposed numerous policies that address the student loan crisis. One such provision, included in the American Rescue Plan Act of 2021, makes all student loan forgiveness completely tax-free from Jan. 1, 2021, to Dec. 31, 2025.
What Is the First Rule Regarding Student Loan Payback While in College?
Knowing how interest accumulates on your loan is critical. Is it suspended or deferred while you are a student, or does it accumulate regardless of status? Interest on private and unsubsidized federal direct loans accumulates while you’re in school, while interest on subsidized federal direct loans doesn’t.
What About the Grace Period?
You must begin paying back student loans once you’re enrolled in less than half of the courses expected of a full-time student. Still, a six-month grace period is often available. During this time things continue as they did during school: Interest accumulates, but you won’t have to make payments.
Should I Begin Paying My Student Loan Interest During School?
The answer isn’t a simple yes or no. Are you able to work while going to school? Are your parents able to pay the interest? If working to pay interest during school will keep you from meeting your educational goals, paying the interest may not be worth it.
The Bottom Line
By calculating how much student loan interest you will accrue during school, you’ll have the information you need to make an important decision. Should I make student loan interest payments during college? There’s no correct answer. But it is an analysis every student, perhaps with some help from their parents, needs to perform for themselves.
By doing this analysis ahead of time, making the choice, and understanding your borrowing circumstances, you’ll be well prepared to pay off your remaining debt after graduation. And you won’t be hit with any unwelcome surprises after you receive your diploma.