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Getting a Jump on Interest

If you have some extra cash from earnings, gifts or your own own smart budgeting, consider putting some of it toward the interest on your student loans. Even a small payment while you're in school can reduce the amount you'll repay later and may lower your future monthly payments. A one-time $100 interest payment on a $10,000 private student loan could save almost 1.5 times that over the life of the loan. Larger payments can mean even bigger savings.

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 One Interest-Only Payment Each College Year
  $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.

Making interest payments while you're in school isn't required, but even small contributions can have a meaningful impact on your future repayment costs. If your budget allows, paying down interest before repayment begins or making extra payments may lower your monthly payment and reduce the amount you repay over time. The earlier you start, the more opportunity you have to save.

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