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.

Making-Interest-Payments-SaveYouMoney-infographic

Download a PDF of this infographic.

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.

By: Iowa Student Loan

6 Ways to Help Your Student Save

6-Tips-to-Help-Your-Student-Save

If you’re not independently wealthy, chances are you’ll be relying on a variety of sources to help your child pay for college: scholarships, loans, your own savings and earnings, and your student’s savings and earnings. How can you help your student maximize savings so you don’t end up draining your retirement resources to help them out?

1. Understand how much your student will need.

Many free online calculators provide estimated college expenses for a variety of college types for the year your student will enter college. Try different scenarios to understand the range of expected college expense.

2. Foster an environment of saving.

What do you do with your paycheck? If you expect your child to save 50% of earnings in a savings account, set an example by building your own savings. The same goes for discount shopping, clipping coupons and so on.

3. Encourage your student to reduce expenses.

If your child tends to spend a large portion of earnings and gift money on clothes, for example, work with him or her to find ways to dress in the same manner for less. Think creatively—garage sales, thrift shops and discount store sales can provide a wealth of bargains.

4. Explore interest-bearing accounts with your child. 

Leverage savings by depositing the money in an interest-bearing account. Spend some time researching options and discussing the risks and advantages to different account types. Make an appointment with a specialist at your own financial institution and attend with your student so you both learn your options.

5. Know the options to reduce college costs.

If you realize you and your child will not be able to save enough for college by the time he or she will be ready to enroll, consider how to reduce the overall cost of college. Will your student be able to live at home? Attend a less-expensive school, at least for part of his or her education? Work while attending college? Apply for more scholarships and grants? Graduate early?

6. Set goals and monitor progress.

Use what you’ve learned about college costs and financial products to set goals. Then, periodically check that your student is working toward those goals. You may consider a matching contribution or other reward for progress.

By: Iowa Student Loan

How Much Should You Save for College?

How-Much-Should-You-Save-for-College

At the start of your senior year in high school, how you’ll pay for college may not be a high priority yet. It’s something you should be thinking about, though, as you consider different colleges and the costs associated with attending each one.

A national study, How America Pays for College 2016, shows that the average student contributes 12% to the total cost of his or her college education. That is money from the student’s income and savings, not student loans.

So, how much should you plan to save for college this year?

That answer depends on a multitude of different factors, but the easiest response is “as much as possible.”

If you want a more precise number, though, there are things you can do now to determine how much you want to save during the next 12 months.

Create a Budget

Use an in-school budget tool to start forming an idea of how much money you’ll need to live on each month. It’s OK to guess right now and try out different calculations. How much will you cover with grants, scholarship and student loans, and how much will you need to have on hand each month for your extra costs?

If you live on campus in a dorm during your freshman year at college, many of your expenses will be set and you’ll be left with a smaller number of variable categories. But if you’ll be living off campus, you will have to calculate additional costs like your portion of the monthly rent, gas and car maintenance, and how you will fill a refrigerator.

Figuring out how much you will need each month can help you set a goal for the amount you definitely want to save during your senior year.

Compare Costs

While you’re creating different in-school budget scenarios, be sure to consider the costs needed for different schools you’re considering. Less-expensive schools might seem like the way to save money, but many times those institutions also have less money to offer in terms of scholarships and grants compared to more-expensive colleges or universities.

Anticipate that you will need more spending money than you think to ensure you don’t greatly underestimate how much you will need to save.

Reduce Expenses

Is your budget a lot higher than you expected? Check out these ideas for ways to save on supplies. Will any of those options help reduce your monthly budget?

You can also consider options such as:

  • Living at home and attending a community college for your first year or two to meet your general education requirements.
  • Planning to work part-time during college to help you cover some monthly expenses.
  • Cutting back on entertainment or other non-necessities to reduce the amount needed for spending money each month.

It may seem like a daunting task, but the more you’re able to save for college today means less that you will have to borrow in the future.

By: Iowa Student Loan

Save Now or Pay More Later

Using-Savings-vs-Loans_social-image

Whether you’re planning for your own or your child’s education, saving instead of borrowing for college has one simple but very important advantage: It will cost you less money.

Saving $1,000, $5,000 or $20,000 before starting college is different than borrowing that same amount as it’s needed because of the interest you will have to pay on loans during repayment. Even though interest earned on any money you save may be limited in today’s financial environment, repaying interest on a loan will not be as minimal.

For example, Jane’s parents began saving for their daughter’s education when she was a toddler and have $20,000 in savings when she begins college. John’s parents, on the other hand, wanted him to pay for school himself, so he borrowed $20,000 during four years of college. Over time, John will pay back the $20,000 he borrowed plus an additional $12,167.81 in interest.*

Using-Savings-vs-Loans_infographic

Additional Benefits

Using savings to pay for college instead of borrowing has other benefits that can pay off in the future.

  • Learning to focus on saving now can be the start a good habit for a lifetime of financial success. If saving is expected of you at a young age, it will become a habit that will likely continue into adulthood when a solid savings account can prevent economic distress in emergencies.
  • Saving money typically means maintaining a saving account, at minimum, and potentially includes options such as CDs (certificates of deposit). You need to work with either a bank or credit union to have your money work for you while you save it. Building a positive relationship with your financial institution can benefit you when it comes time to take out a loan for a new car or home.
  • Limiting or eliminating borrowing for school can prevent stress after graduation. It can mean the difference between working one job and living on a comfortable budget instead of working a second part-time job simply to pay monthly student loan bills. See other problems with overborrowing.

By: Iowa Student Loan

 

The $12,167.81 amount of interest assumes:

– John is in school for four years.
– John borrows a total of $20,000 ($5,000 for each of four years) in federal unsubsidized loans.
– The loans have a fixed interest rate of 4.29% and a 10-year repayment period.
– 360 days per year
– 30 days per month
– In-school interest accrual begins at loan origination, capitalizing once at the beginning of repayment (after 51 months for Year 1 loans, after 39 months for Year 2 loans, after 27 months for Year 3 loans and after 15 months for Year 4 loans)
– There are no origination fees.

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.

Making-Interest-Payments-SaveYouMoney-infographic

Download a PDF of this infographic.

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.

By: Iowa Student Loan

5 Reasons to Start a 529 Plan

5-Reasons-to-Start-529

Saving for your child’s college education can be stressful, but it can also be one the best things you can do to help ensure he or she has a solid financial start in life. If you’re considering different savings options, check out these benefits of a 529 plan.

1. Plans are good nationwide.

Most states, including Iowa, and a number of institutions offer 529 plans, and the plans are not restrictive to the state you live in or where the student attends college. That means parents can take out a College Savings Iowa 529 Plan and the student can use the funds at any eligible school in the country and even some colleges or universities outside the United States.

2. Anyone can open a 529 plan account.

Parents, grandparents and even friends can open a 529 plan for a potential college student. You can even start a 529 plan for your own education.

Parents: Enter to win a $1,500 contribution to a 529 plan.

3. There are tax benefits.

While contributions are not deductible at the federal level, Iowa taxpayers may deduct some contributions from their adjusted gross income. When the plan owners deduct funds to pay eligible college costs, that money is not taxed. For the beneficiary, all earnings on the 529 plan grow tax free.

4. Plans are flexible.

You can choose to change the investment options up to twice per calendar year. Plan owners can make regular contributions, open an account with an initial deposit and never make another contribution, or make deposits whenever it’s convenient. You can even change the beneficiary if the person the account was opened for decides not to attend college.

5. You stay in control of the account.

When you open a 529 account for your child, or anyone else, you maintain control of the account and how the funds are spent. The money is not automatically transferred to the student to spend.

By: Iowa Student Loan

5 Small Changes to Save Big

5-Small-Changes_Save-Big

It’s easy to spend a couple of dollars here and there without realizing how they add up. Before you know it, finances can be pretty tight.

Use these tips to help you make small changes that can save big money over time.

1. Make your own coffee.
Day-to-day caffeine runs can add up quick. Instead of $3 or $4 dollars for a large gourmet takeout coffee, spend less than a dollar per cup to make your own. Your favorite coffee chain might even have a brew-at-home version available at the grocery store.

2. Skip the fast food.
An average fast food meal costs $5 or more. Eating at home or on your meal plan instead for four meals a month saves at least $20 a month and $240 a year outright. If you tend to order a bacon cheeseburger and fries, your health may benefit from more nutritious meals as well.

3. Stay home on date night.
Renting an inexpensive movie instead of going to the theater can save between $7 and $10 for each of you. If you and your significant other see a movie every other week, that’s about $200 a year in savings.

4. Drop the Wi-Fi subscription.
If your campus and local gathering spots offer free Wi-Fi, you may not need to pay for a separate Internet service. Even less expensive plans run around $40 a month. Drop it and save nearly $500 over a year.

5. Work part-time.
Working just 10 hours a week at minimum wage lets you bring in more than $2,400 a year. Plus, you gain valuable experience to improve your chances of landing a great job after college.

See more tips (PDF) on how to save money in college.

By: Iowa Student Loan

How Much Should You Save for College?

How-Much-Should-You-Save-for-College

At the start of your senior year in high school, how you’ll pay for college may not be a high priority yet. It’s something you should be thinking about, though, as you consider different colleges and the costs associated with attending each one.

A national study, How America Pays for College 2015, shows that the average student contributes 11% to the total cost of his or her college education. That is money from the student’s income and savings, not student loans.

So, how much should you plan to save for college this year?

That answer depends on a multitude of different factors, but the easiest response is “as much as possible.”

If you want a more precise number, though, there are things you can do now to determine how much you want to save during the next 12 months.

Create a Budget

Use an in-school budget tool to start forming an idea of how much money you’ll need to live on each month. It’s OK to guess right now and try out different calculations. How much will you cover with grants, scholarship and student loans, and how much will you need to have on hand each month for your extra costs?

If you live on campus in a dorm during your freshman year at college, many of your expenses will be set and you’ll be left with a smaller number of variable categories. But if you’ll be living off campus, you will have to calculate additional costs like your portion of the monthly rent, gas and car maintenance, and how you will fill a refrigerator.

Figuring out how much you will need each month can help you set a goal for the amount you definitely want to save during your senior year.

Compare Costs

While you’re creating different in-school budget scenarios, be sure to consider the costs needed for different schools you’re considering. Less-expensive schools might seem like the way to save money, but many times those institutions also have less money to offer in terms of scholarships and grants compared to more-expensive colleges or universities.

Anticipate that you will need more spending money than you think to ensure you don’t greatly underestimate how much you will need to save.

Reduce Expenses

Is your budget a lot higher than you expected? Check out these ideas for ways to save on supplies. Will any of those options help reduce your monthly budget?

You can also consider options such as:

  • Living at home and attending a community college for your first year or two to meet your general education requirements.
  • Planning to work part-time during college to help you cover some monthly expenses.
  • Cutting back on entertainment or other non-necessities to reduce the amount needed for spending money each month.

It may seem like a daunting task, but the more you’re able to save for college today means less that you will have to borrow in the future.

By: Iowa Student Loan

6 Ways to Help Your Student Save

6-Tips-to-Help-Your-Student-Save

If you’re not independently wealthy, chances are you’ll be relying on a variety of sources to help your child pay for college: scholarships, loans, your own savings and earnings, and your student’s savings and earnings. How can you help your student maximize savings so you don’t end up draining your retirement resources to help them out?

1. Understand how much your student will need.

Many free online calculators provide estimated college expenses for a variety of college types for the year your student will enter college. Try different scenarios to understand the range of expected college expense.

2. Foster an environment of saving.

What do you do with your paycheck? If you expect your child to save 50% of earnings in a savings account, set an example by building your own savings. The same goes for discount shopping, clipping coupons and so on.

3. Encourage your student to reduce expenses.

If your child tends to spend a large portion of earnings and gift money on clothes, for example, work with him or her to find ways to dress in the same manner for less. Think creatively—garage sales, thrift shops and discount store sales can provide a wealth of bargains.

4. Explore interest-bearing accounts with your child. 

Leverage savings by depositing the money in an interest-bearing account. Spend some time researching options and discussing the risks and advantages to different account types. Make an appointment with a specialist at your own financial institution and attend with your student so you both learn your options.

5. Know the options to reduce college costs.

If you realize you and your child will not be able to save enough for college by the time he or she will be ready to enroll, consider how to reduce the overall cost of college. Will your student be able to live at home? Attend a less-expensive school, at least for part of his or her education? Work while attending college? Apply for more scholarships and grants? Graduate early?

6. Set goals and monitor progress.

Use what you’ve learned about college costs and financial products to set goals. Then, periodically check that your student is working toward those goals. You may consider a matching contribution or other reward for progress.

By: Iowa Student Loan

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