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Getting a Jump on Interest

If you have some extra cash from earnings, gifts or your own savvy shopping skills, you may want to invest in your financial future by making an interest payment on your student loans.

Here's an example situation:

Private student loan amount:$10,000

Fixed interest rate: 7%

Repayment term: 10 years

Extra payment made: Beginning of first year of a four-year college career

Examples of savings over the life of the loan by making single interest-only payment.
  Amount of Single Interest-Only Payment
  $0.00 $100.00 $200.00 $300.00
Loan Amount + In-school interest $13,150.00 $13,010.67 $12,871.34 $12,732.01
Monthly Student Loan Payment $152.68 $151.52 $150.36 $149.20
Total Repayment Amount $18,321.60 $18,182.40 $18,043.20 $17,904.00
Savings Over the Life of the Loan $0.00 $139.20 $278.40 $417.60

Simple interest is calculated based on a $10,000 principal balance x interest rate x term of 54 months (48 months in-school + 6-month grace period). The total repayment amount includes interest accrual over the life of the loan and is based on making a single interest-only payment before the repayment period begins. Savings over the life of the loan is equal to the monthly reduction in payment amount multiplied by the 120 payments made over the life of the loan.

Now, let's assume you need to take out $10,000 in private student loans at the same rate for each of four years, and you are able to make one-time payments each of those years.

Example of savings over the life of the loan by making single interest-only payment at the beginning of each year for four years.
  Amount of Single Interest-Only Payment
  $0.00 $100.00 $200.00 $300.00
Savings Over the Life of the Loan $0.00 $547.20 $1,104.00 $1,662.00

Calculations are the same as above except interest accrues over 36 months + 6-month grace period for a loan taken out the second year of college, 24 months + 6-month grace period for a loan taken out the third year of college and 12 months + 6-month grace period for a loan taken out the fourth year of college.

This example is based on a fixed interest rate. You can read more about fixed vs. variable interest on student loans.

The information above shows how making one-time interest-only payments can help reduce your student loan burden. Other options include making interest payments before entering repayment and making extra payments on your student loans.

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