Don’t Defer, Pay Student Loans Early


With classes to attend and homework to complete, you probably haven’t thought much about paying off your student loans. Deferring payment until after graduation is common practice and easy, but putting off repayment can be costly.

Loan capitalization costs

If you have an unsubsidized student loan, which starts accruing interest as soon as you take out the loan, waiting until after graduation can mean paying significantly more over the life of the loan. For instance, according to Sallie Mae, if you have a $5,500 loan at 6.8 percent interest and make no payments for four years and during the six-month post-graduation grace period, you’ll end up owing an additional $1,500 in accrued interest.

Your amount owed jumps to $7,000 because of capitalization. As the loan’s unpaid interest accumulates and increases the overall loan, you pay even more interest. When you start paying after graduation, your monthly payment is much higher than it would have been if you’d paid interest while in college, which on the loan mentioned here is about $31 per month. Pay even more toward the principal, and you can graduate owing less than the original loan.

Of course, making loan payments as a starving student isn’t easy. Try these five tips for coming up with the necessary cash.

1. Shave 10% from your monthly spending

With a lean student budget, it’s likely that you don’t have any big ticket items you can cut in order to make a monthly loan payment. You may be able to slice a small percentage from your overall budget, though, and redirect the savings to your student loans.

If you’re living on campus with a meal plan and are spending $50 a week on items like entertainment, supplies and gifts, for instance, try shaving $5 off per week, which amounts to just 72 cents per day. Use the resulting $20 monthly savings to pay down your student loan debt.

2. Make it automatic

Rather than waiting until the end of the month to come up with a chunk of money to pay toward your student loan, which can be challenging, automate frequent small savings withdrawals. For instance, every Wednesday, have $5 withdrawn from your checking and deposited into your savings account, or have the $5 automatically posted to your student loan account. Many student loan providers will lower your interest rate by about .25 percent if you set up automatic payments, and paying weekly means you make 13 months of payments per year.

3. Earmark cash gifts

When you get a cash gift from family members like your parents or grandparents, who may encourage you to buy or do something fun with the money, stay focused on your goal of not graduating in deep debt and immediately apply the cash to your student loans.

4. Collect spare change

Spare change may seem insignificant, but it can quickly add up to a student loan payment. Find 50 cents a day, and you’ll have $15 towards your loan at the end of the month.

Save your change throughout the week, and ask your parents to start collecting theirs. When you explain that it’s for the worthy cause of paying off your student loans, they’ll probably agree. Use whatever change you save each month to make a payment toward your loan.

5. Earn extra cash

A wide variety of opportunities exist for students to earn money for paying off student loans, and in some cases you don’t even have to leave campus. Try tutoring, participating in studies and surveys, donating blood and plasma, re-selling used textbooks, babysitting and finding a job in your department.

Use these savings tips to pay student loans off early while you’re in school, and you can look forward to an easier financial future when you graduate.

Julie Bawden-Davis is a staff writer for SuperMoney. Her mission is to help fight your evil debt blob and get your personal finances in tip top shape.
Copyright © 2013 Julie Bawden-Davis
Photo: thisisbossi


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