Should you repay student loans while in school? How to make the call
When you first get approved for your federal student loans, it may seem like a no-brainer to take the deferment option while you’re in school. After all, not having to pay a bill until later sure feels better than having to start paying it right away. And let’s be honest: Most college or graduate students don’t feel like they’re flush with extra cash to put toward loan payments.
The truth is, deferment makes sense in some cases, but not all. Depending on your personal circumstances, you may be better off not taking the deferment option on your student loans and making payments right away — even if they’re tiny.
Here’s what you need to know about when deferment does or doesn’t make sense — and how to manage those payments if you decide to opt out of deferment.
Pros and cons of deferment
First, let’s talk about what in-school deferment actually means.
For most federal and private student loans, you can defer payments while you’re enrolled in school at least half-time. Payments are generally scheduled to begin shortly after you leave school. (Federal loans do this automatically.)
Here’s the wrinkle: What happens during deferment is a little different for subsidized and unsubsidized federal student loans. Subsidized federal student loans don’t accrue interest while you’re in school. If you took out $10k in loans during your college career, you’d graduate owing (drum roll please)… a total of $10k.
However, unsubsidized federal or private student loans do accrue interest while you’re in school. So, your actual balance on that same $10k in loans will be higher when your payments are scheduled to begin. (Exactly how much higher depends on your interest rates and how long you were in school.)
In short, deferring payments on subsidized loans doesn’t cost you any money in the long term. But deferring on unsubsidized loans will — both your total amount owed and your monthly payment will be just a tad higher.
(One word of caution: The longer you defer, the longer that interest accrues. If you know you’re likely to need more than five years to finish a degree, or if you plan to go straight from college to grad school, your total cost of deferment will be even higher.)
The other major consideration is your cash flow while you’re in school. As we noted above, college students aren’t generally known for having tons of disposable income.
The idea of starting to pay your student loans before you’ve even finished your first semester can seem daunting, if not downright impossible. We get it. But we’ve also got some tips that might make it more feasible than you’d think. And it won’t mean a diet of ramen noodles and peanut butter for the next four to six years. Promise.
Figure out your best repayment strategy
To decide if, when, and how to forego in-school deferment on some or all of your student loans, you need to consider your specific circumstances. What works for your roommate, or even your older sibling who attends the same college, might not be the best option for you.
First, look at your total loan package to confirm how much you’re borrowing through federal subsidized and unsubsidized loans or private loans.
For unsubsidized loans, the cheapest long-term option is to opt out of deferment and start making payments as soon as possible to prevent that interest from growing while you’re studying. (See the section below for ideas on how to do this.)
For your subsidized loans, the math isn’t as clear cut. Paying while you’re in school won’t save you any interest — but it will reduce your total principal. Remember our earlier example with the $10k student loan? If you make small regular payments while you’re in school — say, $25/month — you could knock that balance down by about $1k to $2k. Instead of graduating with $10k in debt, you’d only have $8-$9k. Not too shabby. Plus, when interest does start accruing, it’ll be on that smaller amount.
TL;DR: Deferring payments on a subsidized loan won’t cost you money but if you can pay them while you’re in school it will save money.
The next step is to look at your finances. If you haven’t already put together a rough budget for when you’re in school, do so now. You’ll need to have an idea of how much you’ll be spending vs. how much you’ll have coming in.
If you have any financial wiggle room at all — extra money from a summer job, a side hustle that brings in extra cash, or even a grandma who’s generous at birthdays and Christmas — you just might have enough to make forgoing deferment an option.
Make your repayment strategy work for you — no matter your circumstances
Let’s say it turns out your income just barely covers your basic expenses. In that case, deferment might be your best option. You definitely don’t want to sign up for payments that you can’t guarantee you’ll make. If you default on your payments, it can cause a lot of problems in the long run.
In that case, you can still take advantage of prepayments by making them when you can — without being required to make them. Federal student loans don’t have prepayment penalties. If you chose to defer your payments during school but then come into an unexpected bit of money, you can still apply it to your loan. Just contact your loan servicer (you may also have to go through your college financial aid office) to find out how to do so.
Another option: Park that money in a low-risk, interest-bearing account like a savings account or CD and let it grow while you’re in school. (Don’t touch it unless you absolutely must.) When you graduate, you’ll have a nice nest egg you can use to pay off a chunk of your student loans. Or, depending on your circumstances, you can use part of it for that and part for other post-graduation expenses.
Types of repayment plans
If you do want to forego deferment, there are a few different options you can consider. Details vary by lender, so you’ll need to check with them, but most offer payment options such as: low, fixed payments (think: $25/month or so) while you’re in school or plans where you pay only the accruing interest until you leave school.
In general, the interest-only plans will cost you more upfront but leave you with a smaller loan balance upon leaving school. The fixed-payment plan is usually cheaper on a month-to-month basis, but any interest you haven’t paid off by the time you finish school will be added to your loan balance. So, it might not reduce that loan balance as much as the interest-only plan.
Forgoing deferment can get you some other nice benefits too. Many lenders offer other benefits, such as a slightly lower interest rate if you set up automatic payments, which saves you even more money over the life of your loan.
Another repayment option to consider
Still debating? If you have private student loans and used a parent or other relative as a cosigner, they’re also able to make prepayments on those loans. It’s worth having the discussion and running the numbers with them to see if they’d be willing to do so.
One major selling point for cosigners to take this on: A smaller debt load when you graduate means you’ll be more able to make all the loan payments yourself once you graduate. A relatively small investment by your cosigner while you’re in school could save them having to take over the loan payments later if you run into financial challenges early in your career. (No judgment – it happens sometimes.) Having a smaller loan balance can also make it easier for you to remove your cosigner after you graduate.
Even if you don’t have a cosigner, if your family is providing any financial help while you’re in school, it may make sense to put some of that money toward loan repayments. If nothing else, they might feel better about gifting that money toward your future financial stability as opposed to mundane expenses like takeout dinners and the dorm laundromat.
Bottom line: If you can afford to do it, even in a tiny way, you should try to make some type of payment toward your student loans while you’re in school. Going to college is an investment in your future; so is minimizing the total cost of that education.
Nitro has other ideas and strategies to help you reduce the total cost of your college education. Check out our scholarship hub for more funding resources. More scholarships means fewer loans to worry about!