When Should You Start Repaying Your Student Loans?

Should you start repaying your student loans and parent loans during the in-school period, or wait until after graduation? Payments made during the in-school period will reduce the debt at graduation and save interest over the life of the loan. 

Impact on Loan Balance at Repayment

If a borrower does not make any payments during the in-school and grace periods, the loan balance when the loans enter repayment will usually be about 20% to 30% higher than the amount originally borrowed. The actual increase in debt at graduation or at repayment depends on the interest rate and the amounts borrowed each year. 

If the borrower makes any payment during the in-school and grace periods, it will reduce the amount of debt at repayment and the total interest paid over the life of the loan.

For example, paying $25 per loan per month during the in-school and grace periods will reduce the total interest paid over the life of the loan by $1,228, assuming a 5% interest rate and a 10-year repayment term.

Use our Student Loan Prepayment Calculator to evaluate the impact of making extra payments, showing you how much you save on interest by making extra payments and how much extra you’d have to pay to pay off your debt quicker.

See also: How Student Loan Interest Works

Options for In-School Payments

Since there are no prepayment penalties on federal and private student loans, nothing stops a borrower from making extra payments in any amount. However, some lenders have established programs that make it easier for borrowers to automatically make payments during the in-school and grace periods. For example, federal student loans allow full deferment and full payments, but not fixed payments and interest-only payments, so the borrower would have to implement fixed and interest-only payments on their own. 

Options for making payments during the in-school and grace periods include: 

• Full Deferment. If the borrower is enrolled at least half-time, they can choose to make no payments during the in-school and grace periods. Interest that accrues during the in-school and grace periods will be capitalized by adding it to the loan balance, increasing the amount of debt. Federal student loans capitalize the interest once, when the loan enters repayment. Private student loans may capitalize the interest more frequently, as frequently as monthly. 
• Fixed Payments. Also known as touch payments, fixed payments require the borrower to make a fixed monthly payment for each loan, typically $25 per loan per month. Fixed payments are offered by many private student loans. 
• Interest-Only Payments. With interest-only payments, the borrower pays the interest as it accrues, preventing the loan balance from increasing. Many private student loans allow borrowers to make interest-only payments during the in-school and grace periods, switching to fully-amortized loan payments when the loans enter repayment. Interest-only payments might start off at about $25 a month during the freshman year and increase to around $100 a month during the senior year. 
• Full Payments. With full payments, the borrower begins making fully-amortized loan payments when the loan is fully disbursed. This is an option for Federal Parent PLUS loans and many private student loans. 

Some lenders offer an interest rate reduction as an incentive to encourage borrowers to make payments during the in-school and grace periods. Sallie Mae’s Smart Option student loans were the first to offer this kind of discount. 

Borrowers can switch from one in-school payment option to another. However, if the borrower is receiving an interest rate reduction for making in-school payments, that benefit would end if the borrower stopped making payments during the in-school and grace periods. 

All of the borrower’s loans will be in the same in-school payment program. 

The more a borrower pays during the in-school and grace periods, the lower the loan balance when the loan enters repayment.

Full payments yield the lowest loan balance at the end of the grace period. Depending on the interest rate and amount of debt, either interest-only or fixed payments will yield the next lower loan balance at repayment. Whichever option has the greater monthly payment will yield the lower loan balance when the loans enter repayment. 

Borrowers who make payments during the in-school and grace periods are less likely to default on their loans, in part because it makes the borrower more aware of the amount of debt they are taking on, as they borrow it. Lenders also like in-school payments because it gives them an early warning of when the borrower experiences financial difficulty.  

See also: How to Minimize Student Loan Debt

Impact on Total Interest Paid

Making payments during the in-school and grace periods can have a big impact on the total interest paid over the life of the loan.

For example, compare the impact of full payments with full deferment over a 10-year repayment term. Depending on the interest rate, full payments saves a quarter to a third of the total interest paid as compared with full deferment. This saves thousands of dollars per $10,000 borrowed.  

This is the most extreme comparison, so other in-school payment options will yield less of a financial benefit than full payments. Interest-only payments save a quarter to half as much as full payments. 

In-School Payments vs. Borrowing Less

An alternative to making in-school payments is to use the money to borrow less. 

Regardless of whether the in-school payments are interest-only or full payments, the savings of in-school payments vs. borrowing less are very small, and entirely due to differences in interest capitalization and the use of lump sum payments vs. monthly payments. 

How to Get the Money to Make In-School Payments 

There are several ways to get the money to make payments during the in-school and grace periods.

• Work a part-time job during the school year and a full-time job in the summer
• Use savings to make the in-school payments
• Gifts from friends and family can be applied to the student loans

When Should You Not Make Payments While in School?

If you expect to qualify for loan forgiveness, it is better to not make payments when they are not required, because that will just reduce the amount of student loan forgiveness.

Extra payments should be applied to the loans that have the highest interest rates. If the student has higher-rate debt, such as credit card debt, they should prioritize making extra payments on that debt first. 

Subsidized loans should be preserved as much as possible, because the federal government pays the interest on these loans during deferment periods. For example, if the student plans on going to graduate school, the subsidized loans will not accumulate interest while the student is enrolled in graduate school.

After the student graduates, but before the end of the grace period, it may be a good idea for the student to start building an emergency fund. There will also be other demands on the student’s money, such as security and utility deposits for a new apartment and business attire for a new job.