Remember the rush of relief you felt when you got your first student loan? Of course, you were aware you’d have to pay it back at some point. With interest. But on that day, with the money in place, you could let your mind move on to other things. New classes. New friends. New life.
What you probably weren’t thinking about then was how and when the interest would begin accruing on that loan, or the next one, or the next. Or how that interest could affect the final price of your education—not to mention your financial future. All you knew was that you needed that money if you were going to go to college.
Understanding all the rules involved with student loan interest accrual can be frustrating. It’s also crucial. To keep that budgetary burden from breaking your back, you need to know how student loan interest works while you’re in school, and through your early working years.ac
That starts with identifying whether your student loans are private or federal. And if they’re federal loans, are they subsidized or unsubsidized? Each type has its own benefits and protections that will affect when the interest starts accruing. Here are some other things smart borrowers should know about:
Do Student Loans Accrue Interest While You’re Still in School?
It depends. If you have a subsidized federal loan , the government might pay the interest during certain periods—but when you graduate, the interest becomes your responsibility. If you have an unsubsidized or private loan, your interest payments likely will start while you’re still in school. You won’t be required to make payments, but if you don’t, you may graduate with a higher balance than when you started.
What About the Student Loan “Grace Period”?
Again, different loans offer different terms, and with federal loans, the terms can vary depending on when your funds were disbursed. Most federal loans have a grace period, a set amount of time (usually six months) after you graduate, leave school, or drop below half-time enrollment before you must begin repayment on your loan.
The grace period gives you time to get your finances in order, get back to full-time student status or maybe get a job. But with most loans, including unsubsidized federal student loans, interest still accrues during that time.
Here’s a high-level breakdown of how some loans treat interest accrual:
Federal Subsidized Loans (Direct and Stafford)
• Interest does not accrue while in school.
• Grace period is six months, and interest doesn’t accrue during that time.
Federal Unsubsidized Loans (Direct and Stafford)
• Interest accrues while in school.
• Grace period is six months, and interest accrues during that time.
Federal PLUS Loans
• Interest accrues while in school.
• No grace period, but borrowers may be eligible for deferment or forbearance.
• Every lender is different, but interest likely will accrue while in school.
• Some lenders do offer a grace period, but check with yours to be sure of the terms of your loan.
What Happens If You Don’t Stay on Top of Accruing Interest?
Student loan interest can accrue on certain loans when you’re in school, during a grace period, deferment, or forbearance (usually associated with a financial hardship or illness). When you don’t pay the interest as it accrues, your lender may “capitalize” the loan, which means they will add the interest to the principal balance. Interest is then charged on that higher balance, further increasing the overall cost of the loan and your monthly payment.
Think of all that accumulating interest like a snowball rolling down a mountain. You might be able to stay ahead of it for a while, but it also might catch up with you. If you go with an “I’ll think about it tomorrow” attitude (easy to do, let’s face it, while you’re busy with classes), your balance might grow more than you’d expect.
How Can You Minimize Student Loan Interest Accrual While in School?
One way to help stay out of trouble with your student loans is to borrow only what you’ll really need. If you’re like a lot of students, the more you have, the more you’ll spend—so try to hone a little self-awareness (and self-control) when it comes to your appetite for food, drink, clothes, etc.
A work-study or part-time job in another way to help take the sting out of student loan payments. You may have the best intentions when it comes to getting a job to help make those loan payments, but it can be tough to manage when you’re busy with academics, extracurriculars, internships and, later, nailing down where you’ll live and work after you graduate.
Once you’ve gone to the student loan trough once, it’s easier to go back. It’s important to think twice before you go out and, say, buy a car with that borrowed money (technically a no-no with a federal loan) or use it to travel during a break.
Getting Out of Student Loan Trouble
It’s a solid idea to put together a repayment plan as soon as you take out your first loan. But it’s never too late to regroup. Though you may have selected or been assigned a repayment plan when you first began paying back any federal student loans, you may be able to change plans (and there are several repayment plans to choose from).
If you have private student loans, you may also find your lender is willing to work with you on new terms. Refinancing your student loans might be a good option for you as well. Your current interest rates might be outdated—and higher than they need to be.
When you took out your private loans, you were likely assigned an interest rate based on your financial situation at that time. When you got your federal loans, the interest rate tables were determined by federal lawmakers. Both situations may have changed and improved, and you could be eligible to refinance at a lower rate with a private lender.
If your biggest problem is keeping track of multiple payments to multiple lenders for various types of loans with different interest rates, then you may want to look into refinancing your multiple loans.
There are plenty of free, interactive educational tools that can help—including SoFi’s Student Debt Navigator—to get you back on the right track.
Don’t forget to keep an open mind. If you ask around, you’ll hear lots of opinions and information about both government and private repayment alternatives. One common myth is that you can’t get your federal student loans and private student loans down to one payment.
While it’s true that you can’t use the federal Direct Loan Consolidation program to combine your federal and private loans, you can pull them together into one payment by refinancing with a private lender—understanding that you will lose certain federal benefits if you do so, like those deferment and forbearance programs mentioned above.
Refinancing with SoFi
If you’re afraid you’ll lose the perks that came with your old loans (your grace period, for example), you should know that is a real possibility. But some lenders, including SoFi, will honor up to six months of most existing student loan grace periods (PLUS loans will go into immediate repayment once the loans are refinanced).
Refinancing can be a great option for working graduates who have high-interest, unsubsidized Direct loans, Graduate PLUS loans, and/or private loans. With a qualifying personal financial background, you could substantially lower your interest rate or make your monthly payments more manageable.
Whether you need help paying for school or help paying off the loans you already have, SoFi offers competitive interest rates and great member benefits as well.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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