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How Paying Student Loan Interest in College Pays Off

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School is back in session, and if you’re like most college students, student loans are a fact of life. For many — focused on grades and weekends of relaxation — repaying those loans is something to think about “later,” after graduation and once they’ve entered the work force. But beginning to whittle away the interest on your student loan debt now could make a significant difference to your finances in the future.

“I had no idea what my loans were when I came to college,” Kansas State University junior Hope Abarr says. “My mom signed me up for loans, and it wasn’t until about halfway through freshman year when I started getting emails about them that I started asking questions and trying to figure out the best way to handle them.”

Seven in 10 college graduates in 2012 turned their tassels on the big day saddled with student loan debt, an average of nearly $30,000 per borrower, according to the Institute for College Access & Success. On top of that, many of these graduates struggle to find work.

The Benefits of Paying Interest

Unless your student loan is subsidized, it starts accruing interest right away. And this isn’t just any interest — if you don’t pay it as it accumulates, it’s capitalized, meaning your interest is added to the principal (amount you borrowed), and it now earns interest, too.

“You’re getting a snowball effect because this debt is growing as you kick it down the road,” says certified financial planner Tim Higgins, author of “Pay for College Without Sacrificing Your Retirement.”

Students have the option to pay or defer their interest payments while they are in school. When these payments are deferred and the interest capitalized, the loan balance grows.

“When you delay your payments, you are paying interest on top of interest,” says Higgins, who recommends that students find a way to make interest payments while in school. Though the interest that accumulates if you defer may not seem like a considerable sum, when you’re faced with thousands of dollars in debt upon graduation, every bit helps.

Abarr is a family studies and human services major who plans to go on to nursing school. When she arrived at KSU, she began in the pre-veterinary medicine program but changed majors in part due to the cost of that program. As the first member of her family to attend a four-year college, she says cost has been a consideration at every stage — from choosing a college where she would qualify for in-state tuition, to choosing a major that was more budget-friendly.

She was fortunate to be connected with a service that pairs finance majors with other students to provide personal finance counseling. That’s where she learned about paying on her loans while in school. “I think the interest payments on my unsubsidized loans are around $50 each month, but I try to pay as much as I can on them,” she says.

While interest-only payments don’t affect the largest portion of your student loan debt — your principal — they do hold the snowball at bay. Higgins explains these payments can provide good financial lessons and encourage academic focus by making the college investment clear to students who may otherwise not pay much attention to the cost of school until after graduation.

The U.S. Department of Education reported in September that of all student borrowers who entered repayment in fiscal year 2011, 13.7 percent defaulted or failed to make their payments as scheduled. While this number is down slightly from past years, it illustrates that a good portion of college graduates are struggling to get their student loan debt under control. Making those payments a habit early on could save you from trouble when it’s time to enter the workforce.

Drawbacks to Paying Student Loans While in School

Perhaps the only drawback to paying your interest while in school is the fact the cost may require you to reprioritize. Students don’t typically have much cash. Fortunately, interest-only payments are relatively small. Depending on the amount you’ve borrowed and the interest rate on your loan, your monthly interest-only payment could cost less than a new pair of shoes.

Higgins says college students should consider a job on campus or in the service industry where they can make money to pay interest, increase cash flow for other expenses and build their résumé.

“Get a job on campus or down the street at a coffee shop,” he suggets. “This does two things. One, it allows you to earn some kind of revenue for living expenses but also that can be applied to your student loan interest. Two, it builds your résumé so you can increase your earning potential when you enter the workforce after graduation.”

Abarr has both subsidized and unsubsidized student loans. Though she typically takes 15 credit hours each semester, she also works full time during the summers and part time at the library during the school year.

“Watching my family make bad financial decisions, I’m trying to make choices now that will give me the best chance when I get out of school,” she says.

Depending on your schedule, working may not be possible. For students who have no choice but to wait to pay interest, Higgins suggests they focus on quality internships.

“If you can’t pay at least your interest, you need to focus on how you’ll pay your debt down when you graduate,” he says. “And more than your expensive school, your internships will help you land the kind of job and income you want.”

Most college students take out loans. And with each loan comes the promise of repayment. If you’re a student, positioning yourself to tackle your student loan debt now — whether through making interest payments or boosting your chances of a high-paying career upon graduation — may reduce your risk of default and ensure a more profitable future.

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How Paying Student Loan Interest in College Pays Off

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