Taming Student Loan Debt With Prepayments

Today, two-thirds of college students leave school with at least some debt from college loans. The average debt is approaching $25,000, a figure that includes not just the original amounts borrowed but, for most students, accumulated interest as well.

For students who hold government-issued federal student loans, repayment on those loans won’t begin until six months after graduation, at which point most students will enter a standard 10-year loan repayment period.

Loans That Sit, Getting Bigger

While a student is enrolled in school at least half-time and during the six-month grace period after the student leaves school, even though payments on federal school loans aren’t required, interest on the loans continues to accrue.

If the loans are unsubsidized, the accrued interest will be added to the loan balance and capitalized, and the student will be responsible for paying that interest.

With subsidized federal college loans — which have smaller award amounts than unsubsidized loans and which are awarded only to those students who demonstrate financial need — the government will make the interest payments while the student is in school, in a grace period, or in another authorized period of deferment.

The bulk of most students’ college loan debt will consist of unsubsidized loans — loans that get larger as time goes by and you make your way through college, simply because of the buildup of interest.

Preventing Interest Bloat

As a college student, there are steps you can take, however, to counteract this ballooning of your school loans. There are several ways that you can manage your student loan debt and rein in the added burden of accrued interest charges, both while you’re in school and after graduation.

Seemingly small steps can help you significantly reduce the amount of college loan debt you’re carrying at graduation and could shorten the amount of time it will take you to repay those loans from a decade to seven years or less.

1) Make interest-only payments

Most student borrowers choose not to make any payments on their student loans while in school, which leads to the loans getting larger as interest charges accumulate and get tacked on to the original loan balance.

But you can easily prevent this “interest bloat” simply by making monthly interest-only payments, paying just enough to cover all the accrued interest charges each month.

The interest rate on unsubsidized federal undergraduate loans is low, fixed at just 6.8 percent. Even on a $10,000 loan, the interest that accumulates each month is just $56.67. By paying $57 a month while you’re in school, you’ll keep your loan balance from getting bigger than what you originally borrowed. loans for plumbers