Sounds like a crazy theory, right? I bet your thinking “If I had the money, I wouldn’t have needed a loan!” Well, let’s break it down a bit and it may not be that crazy after all. Just paying back a little could make a big difference.
Student loans typically fall into one of two categories: deferred or immediate repayment. If your student loan is a “deferred” repayment type, it means that you are not required to pay back your loan while still in school. The repayment is deferred until after you leave school. If your student loan is an “immediate” repayment type, you are required to repay the loan after it is disbursed (while in school).
Federal Deferred Repayment Loans
These are by far the most popular with students as no payments are due while they are attending school, as long as requirements for part-time or full-time status are being met. As you may recall, there are two types of deferred student loans offered by the federal government, the subsidized and unsubsidized loans.
Subsidized Loan – This loan does not accrue interest while you are in school. Interest accrual does not begin until 6 months after you leave school. Making payments while in school may not be where early payments are best applied, especially if you have other loans outstanding that are accruing interest. Focus on loans with accruing interest first if you have some money to repay while in school.
- Unsubsidized Loan – This loan does accrue interest while you are in school. Therefore, 6 months after you leave school, you will be expected to make monthly payments towards the balance borrowed in addition to the interest that accrued while you were in school. If you have money that can be paid to this loan while in school, any payments you make will help to reduce your monthly payment amount when your official repayment begins. Contributing only a small amount can make a difference, such as $25 or $50.
Private lenders offer a few more varieties of repayment options than federal loans, such as deferred repayment, interest-only and immediate repayment. Be sure to understand all the terms and conditions of these loans before you consider making early or extra payments.
- Deferred Repayment Loan – Just like federal unsubsidized loans, no payments are due while attending school and interest is accruing during this time. Private lenders also offer various repayment lengths of 5, 10, or 15 years for repayment. Because these loans require no monthly payment due during the deferment period, any payments, even minimal ones, can help to reduce the interest owed and possibly principal. Making payments during school will provide you with a lower monthly payment after you leave school and saves you money on the total interest costs. Making payments on deferred loans while in school has maximum flexibility so that if you are short on funds in various months, no negative consequences occur if you skip a month. Any small additional payments, whenever you can make them while in school, will benefit you in the end.
TIP: You may want to set up a small automatic monthly payment of $25 or whatever you can afford so that you will benefit with a reduction on your interest rate if it’s offered with auto-pay.
- Interest-Only Loan – Unlike making payments towards a deferred loan when you can, interest-only loans require a minimum monthly payment of the interest accrued only during that month and your principal balance does not decrease even though payments are being made. If you are in a situation that you and/or your cosigner can make payments higher than the required interest-only amount that is due (and the loan has no prepayment penalties), paying additional amounts will have the same positive benefit as mentioned in deferred examples.
- Immediate Repayment Loan – Loans for which repayment is required soon after funds are disbursed, are usually offered at lower interest rates. Repayment typically begins 30 days after money has been disbursed to your school, while you are attending school. These loans often can be repaid in terms of 5, 10, or 15 years.
Student loans are credit products and will impact your credit score in a positive or negative way, depending on how you repay them. Repayment in the maximum number of years making only the minimum payment due will be the most costly in the end. Small extra or early payments can help decrease total costs over the term of your loan if you can manage it. Maybe taking on a part-time job on campus, eliminating some monthly expenses like dining out less, weekend trips, or other impulse purchases can provide the extra funds that could benefit you in the long run with the repayment of your student loans. Paying off loans with higher interest rates first will give you a head start on managing your student loan debt.
If you would like to learn more about borrowing options for student and families, download RISLA’s Borrowing Guide.