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.

2) Make small, even tiny, payments on your principal

Beyond keeping your loan balances in check while you’re in school, you can actually reduce your debt load by paying a little bit more each month, so that you’re not just covering interest charges but also making payments toward your loan principal (the original loan balance).

Loan payments are typically applied first to any interest you owe and then to the principal. Payments that exceed the amount of accumulated interest will be used to reduce your principal balance. By paying down your principal balance while you’re still in school or in your grace period – even if it’s only by $10 or $15 a month -you’ll reduce the size of your college loan debt load by at least a few hundred dollars.

And by reducing your total debt amount, you’re also reducing the size of your monthly loan payment that’s going to be required once you leave school, as well as the amount of time it’s going to take you to repay the remaining loan balance.

3) Don’t ignore your private student loans

If you’re carrying any non-federal private student loans, use this prepayment strategy on those loans as well.

A few private education loan programs already require interest-only payments while you’re in school, but most private loans, like federal loans, allow you to defer making any payments until after graduation. As with federal loans, however, interest will continue to accrue.

Private student loans generally have less flexible repayment terms than federal loans and higher, variable interest rates, so your private loan balances may balloon much more quickly than your federal loans and can quickly spiral into the tens of thousands of dollars. Making interest-only or principal-and-interest payments will help you keep your private loan debt under control.

4) Look for non-loan sources of student aid

As you make your way through your second, third, and fourth years of college, if you find that your monthly student loan interest payments are creeping up beyond what you can comfortably pay, that may be a sign that you’re relying too much on college loans and your debt load is becoming more than you can manage.

Take steps to reduce borrowing by seeking out scholarships and grants, cutting down on living expenses, or finding part-time work.

As a student borrower, you should never lose track of how much you owe in school loans. By maintaining a continual connection to your student loan balances through monthly prepayments, you’ll have a better sense of where you stand financially throughout college and after you graduate.

A sound prepayment strategy will also help you establish good credit and plan for your financial future, knowing that your college loan balances are manageable and your school debt is under control.

 

Similar Articles

The Best Small Business Management Tips You’ll Ever Read

The Best Small Business Management Tips You'll Ever Read Small Business Management Tips: Running a small company can be immensely rewarding. With limited resources at...

5 Ways to Validate Your Business Idea

Be sure to back up your ideas with facts. Investigate the market in which you want to do business. Analyze potential competitors, substitutes, and other...

Five Ways to Validate your Business Idea

Your idea should be supported by facts. Do your research on the industry you are interested in. Research your target industry to find potential substitutes...

What information should go on business cards?

What information should go on business cards? Many business cards contain a lot of information for customers. However, is this the right approach? Experts agree...

The Key Advantages and Disadvantages of Paper and Digital Business Cards

Paper business cards Pros Get your attention quickly A paper-based Digital Business Cards can make a lasting impression from the moment a client touches it. The card's thick...

How do you create a company Facebook page without having a personal account

You can set up an official Facebook page for business without having an account for yourself. Numerous businesses have utilized Facebook to promote their...

HOW TO START A CRAFT-BUSINESS: A STEP BY STEP GUIDE

Are you a crafty person? You are ready to learn how to start your own craft business. There are many artists who paint, stitch and...

How to Sell on Amazonon in 2022: Selling On Amazonon Guide

Are you wondering how to sell on Amazon First, you need to connect Amazon and Shopify. Shopify is an Amazon Partner, which allows entrepreneurs...

Green Business Ideas for Eco-Minded Entrepreneurs

Are you looking to create a business while also protecting the environment? These green business ideas will help you achieve that goal. Consumers are now...

Comments

Advertisment

Instagram

Follow us

[td_block_social_counter facebook="PersonalityRightsDatabase/" twitter="personal_right" open_in_new_window="y" style="style7 td-social-boxed" tdc_css="eyJhbGwiOnsibWFyZ2luLWJvdHRvbSI6IjEwIiwiZGlzcGxheSI6IiJ9fQ==" social_rel="noopener" manual_count_facebook="1000" manual_count_twitter="1000" pinterest="personalityrightsdatabase/" manual_count_pinterest="1000"]

Most Popular

error: Content is protected !!