Paying a little now will save you a lot later
When decided to borrow consider the difference between paying interest as it accrues and choosing to wait until repayment. Below are frequently asked questions and examples of this process.
I don’t plan on making interest payments while I’m in school. How will this affect my loan balance when I have to repay my loans?
All unpaid interest you have accrued at the time of repayment will be added to your loan balance. This process is called capitalization. Below are two examples illustrating the difference between paying interest as it accrues and choosing to wait until repayment. Example 1:
Cate borrowed $5,000 at a 6.8% interest rate and paid the $340 in interest that accrued prior to repayment. At repayment her loan balance will be $5,000.
Kyle borrowed $5,000 at a 6.8% interest rate. He decided to wait until repayment began to pay the $340 in interest that accrued. At repayment his loan balance will be $5,340.
Why does interest increase the cost of my loan so dramatically?
In the example above Cate’s decision to pay the accrued interest before repayment began paid off in the long run and saved her $469.20. However, Kyle ultimately incurred the $469.20 cost because he chose to wait to pay his interest. As you can see below, making interest payments as they accrue will keep your loan repayment at the principal amount you borrowed when it’s time to begin repayment, save you on the total amount of interest you pay, and result in a total cost savings for your loan.
|Compounding Interest Example
|Loan Balance at Repayment:
|Total Loan Cost
|Months in Repayment:
|Total Interest Paid:
|Total Loan Cost:
How can I make borrowing more affordable?
There are a few things you can do to make borrowing more affordable. The tips below are hyperlinked to Federal Student Loan options. If you have a private loan, contact your lender to discuss your options.
- Make interest payments while in school.
- Before repayment understand your repayment plan options and calculate what they will cost you in the long run.
- Before repayment be aware of interest reduction benefits such as signing up for electronic payments.
- When in repayment try to pay more than the minimum monthly payment amount or make extra payments if your budget allows for it. This will save you money on interest in the long run.
- Communicate with your lender if you’re having difficulties paying. If you don’t know who your Federal Student Loan Servicer is contact the Federal Student Aid Information Center at 1-800-4-FED-AID (1-800-433-3243 TTY 1-800-730-8913) or log into www.studentaid.gov.