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Upon graduating from college (or transitioning to less than half-time status), you'll enjoy a six-month grace period before your loan repayments kick in. For many, this period is a relief: You can get your finances in order before your first payment is due, reducing financial stress. However, there’s a key reason why you should consider making payments during this break.
If you hold unsubsidized federal loans, interest starts accumulating while you're still enrolled in school. If you wait an additional six months before making payments, you could end up owing far more than you did when you graduated. This happens because the interest is capitalized, which means it’s added to your loan's principal balance. As a result, you’ll pay interest on the interest. This also applies to private loans, though the terms may differ by lender, so it’s important to review your lender’s policies.
The federal government covers the interest for subsidized loans during both your schooling and the grace period. (Remember, if your loan goes into forbearance, you're responsible for interest on both subsidized and unsubsidized loans.)
“Interest capitalization is a kind of worst-case scenario when it comes to student loans,” reports Student Loan Hero. “This can add years to your repayment period and cost you thousands of dollars over the lifetime of your loan.”
Edvisors, a platform for comparing private loans, highlights that deferring student loan repayments while you're still in school could raise the total amount owed by 10 to 20 percent of the original loan. If you find yourself deferring again, you're only deepening your debt as interest continues to accumulate and capitalize.
To prevent this snowballing of interest, it's best to at least pay off the accumulated interest during your grace period. Additionally, even small payments made while you're in school or during the six months after can ultimately help improve your financial situation, even if they seem insignificant.
While this may not be feasible for everyone, it will ultimately save you money in the long term. As Student Loan Hero advises, if paying just the interest is a struggle, you might want to consider an income-based repayment plan to avoid financial strain once your grace period ends.
