How Making Interest Payments Can Save You Big Money Later
If you’re funding part of your college education with student loans, you may occasionally receive statements, even though no payments are due. Ever wonder why?
Those statements are important, and understanding why can save you money in the long run.
They notify you that, even though you don’t have to make payments while you’re in school, interest is adding up on your loans — every single day. If this interest is not paid as it accrues or before your loans enter repayment (usually six months after you leave school), it will be added to your principal balance. If it is added to your principal balance (a process called capitalization), you will then owe more than you originally borrowed. And, the now larger principal balance starts to accrue interest on a daily basis, so you will be paying interest on the accrued interest.
How can you minimize this increase to your loan balance?
If you manage to earn or save some money while you’re in school, you can make monthly payments that pay down the interest as it accrues.
Here’s an example of how making small payments every month could save you more than $1,500 over the full life of student loans.
Note: The information below is an example only. Your payment amounts will depend on the types of loans you receive and the interest rates and the repayment terms on those loans.
Establishing Financial Habits
Making everyday spending decisions—like whether to order pizza or go to the Caribbean for Spring Break—in college, helps you establish the financial habits you’ll use in the future.
Although eating out every Friday night sounds like a good thing, it may be worth it to give up that treat in exchange for savings of thousands on your future student loan payments.