Student loans should not be forgotten while a student is in school. It's exciting to go to college and it's easy to put the loan documents in a drawer each semester. Actually addressing student loans while in college can have dramatic effects on the debt before graduation.

Photo by Carolyn Forsyth

August, 2017

Managing student loans during college

A student attending a 4 year college needs to understand that student loans have fees and they have interest rates. Some loans are subsidized and interest does not start until the student finishes college.  Unsubsidized loans start generating interest the moment the funds are accessed.  Repayment on these loans is not required to start until 6 months after graduation.

Assume a student has a Stafford Loan (unsubsidized) of $3,500.00 as part of the total financial package.  That loan will have an interest rate of approximately 6.50%.  The loan begins accruing interest when drawn but repayment is not required to begin until 6 months after the student leaves college.

For the first month, this loan generates an interest charge of $19.10.  If you choose to wait on paying that interest, the loan increases by the interest amount to $3,519.10 and for the second month the interest charge increases to $19.20.  So it went up a measly dime.  But let us look at that first year loan balance when the student completes college in 4 years.  Assuming the interest payments were not made on this small loan the student is now looking at paying back $4,670.51 versus $3,500.00 (the original loan amount). Effectively, 33% more is owed than what was originally borrowed and the interest cost has been increasing on this amount.

There are ways to manage Student Loans while in school.

Method One: Pay the interest as you go

Implement a plan to pay the interest on loans while in college.  A student job can easily cover payments in the first year. A ‘pay the interest as you go’ approach, keeps the borrower focused on what has been borrowed and keeps the principal limited to the funds used for college.

Method Two: Pay a flat amount each month

This method is more aggressive (and admittedly more painful) but if an affordable, set amount is paid monthly, loan principal and interest decline. If $100.00 were paid monthly on the above example, the interest cost would actually decline as the loan principal is also being paid down.  At the end of a year, the loan principal has dropped to $2,319 and monthly interest payments have declined to $12.56.

A comparison of the methods for this example shows the amount owed after completing 4 years of college:

In the above example, we are only looking at a single loan. In reality, there are additional loans each year. We can look at the effects of the various approaches with a loan of $3,500 being added each year of college.

Clearly taking an active approach on your loans during the years in College has a beneficial effect. Paying the monthly interest charge keeps the loan principal to the $14,000 borrowed in total. The largest interest payment during college is $75.83 during the last year. That might be a stretch but the key here is to keep paying. Obviously, the flat payment of $100 maintained through college has the most benefit. Both principal and interest are being paid resulting in a loan balance that is 35% below the No Payment approach. Additionally, both of these methods establish the payment discipline that is necessary for repaying a loan.