Lana Oconnell
Federal student loan repayment typically begins six months after graduation or leaving school. However, students can choose to start making payments while still in school, and doing so has its advantages. For instance, paying off student loans early can save money on the total loan cost and give one's credit score a boost. There are two types of federal student loans: subsidized and unsubsidized. Interest for subsidized loans is covered by the government while the borrower is in school, but interest for unsubsidized loans starts building immediately.
Characteristics and Values table for paying off federal student loans during school
| Characteristics | Values |
|---|---|
| Interest | The cost of borrowing money; starts accruing as soon as the money is sent to the school |
| Federal student loans | Subsidized and unsubsidized; the government covers interest for subsidized loans while you're in school, but interest starts building immediately for unsubsidized loans |
| Private student loans | Interest begins to grow as soon as the funds are sent to the school |
| Payment options | In-school payments or deferment until after graduation or leaving school |
| Deferment | Putting off payments; interest continues to grow, resulting in a higher total loan cost |
| Benefits of in-school payments | Lower total loan cost, improved credit score |
| Rehabilitation | After 9 months of reasonable payments, the loan will be in good standing, and eligibility for federal student aid will be regained |
| Consolidation | Faster option to regain eligibility for federal student aid, but the default will remain on the credit report |
| Income-driven repayment (IDR) plan | Can reduce monthly payments, but requires annual renewal of paperwork |
| Forbearance and deferment | Temporary pauses in payments that can provide relief, but may increase the principal balance and monthly payments due to interest |
| Public service loan forgiveness | Available for military members or employees of government or nonprofit organizations |
| Refinancing | Trading multiple student loans for one private loan with better terms to lower interest rates and shorten repayment terms |
| Autopay and bi-weekly payments | Faster repayment methods |
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What You'll Learn
Interest accrual on federal student loans
Federal student loans are available in three main types: subsidized, unsubsidized loans, and PLUS loans. The repayment plan you choose can significantly impact how interest accumulates, especially for federal loans.
Direct Subsidized Loans are offered to undergraduate students with financial needs. The government pays the interest while the borrower is in school, during the grace period, and during deferment periods. This makes Direct Subsidized Loans a low-cost option for eligible students. On the other hand, Direct Unsubsidized Loans are available to undergraduate and graduate students regardless of financial need. Borrowers are generally responsible for paying the interest during all periods for these loans.
Income-driven repayment (IDR) plans can lower your monthly payments but may lead to more interest accrual over time. Standard repayment plans often result in higher monthly payments but less overall interest. Graduated plans start with lower payments that increase over time, which can be helpful if you anticipate your income to grow.
Additionally, interest generally continues to accrue on all types of student loans during periods of forbearance. Forbearance and some deferment will increase your principal balance and monthly payments due to interest and capitalization.
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Benefits of paying off loans during school
Benefits of Paying Off Student Loans During School
Avoid Capitalized Interest
Interest on student loans can start accruing from the date the loan is disbursed, and this interest is then incorporated into the repayment schedule by being added to the principal balance of the loan. This means that you end up paying interest on the interest that accrued during your time in college. Paying off interest on student loans while in school helps you avoid capitalized interest and can save you hundreds or even thousands of dollars in the long run.
Save Money on Total Loan Cost
Making small payments while in school can lower your total loan cost and make your post-school payments more manageable. Federal loan servicers and private lenders may also offer interest rate discounts for automatic payments, and you can reduce your interest rate by 0.25% by signing up for automatic debit.
Build Credit
Making on-time payments is a great way to show lenders you’re responsible and build your credit score. This can be especially beneficial if you don't have much of a credit history yet.
Establish Good Financial Habits
Figuring out how to start paying off student loans while in school can help establish good financial habits early in your adult life. This can include finding a part-time job or a side hustle to help pay down your loans faster and reduce your reliance on student loans.
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Rehabilitation and consolidation
If you have defaulted on your federal student loans, you can consider loan rehabilitation or consolidation to get out of default without immediately repaying your loans in full. Here is a detailed look at these two options:
Rehabilitation
Rehabilitation is a process that allows you to get your federal student loans out of default by making nine on-time payments in ten months. After nine months of reasonable payments, your loan will be in good standing, and you will regain eligibility for federal student aid. Rehabilitation also removes the default note from your credit report, improving your credit score. It is important to note that a defaulted loan can only be rehabilitated once. Additionally, garnishment and treasury offsets may continue during the rehabilitation process.
Consolidation
Consolidation is a faster option than rehabilitation. It involves taking out a new Direct Consolidation Loan to pay off your defaulted debt. You can consolidate defaulted loans right away as long as you don't have a wage garnishment order and agree to repay your new loan under an income-driven plan. Consolidation can be a good choice if you need quick access to federal student aid, such as if you're heading back to school. However, unlike rehabilitation, consolidation will not remove the default from your credit report, and it may require additional collection costs.
When deciding between rehabilitation and consolidation, carefully consider the speed, eligibility rules, and impact on your credit report. If improving your credit score is a priority, rehabilitation may be the better choice. On the other hand, if you need to get out of default as soon as possible, consolidation could be the preferred option.
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Income-driven repayment plans
If you are struggling to pay off your federal student loans, an income-driven repayment (IDR) plan can be a good option. IDR plans can reduce your monthly payments to as low as $0. However, it is important to remember that IDR plans require annual paperwork renewals.
To choose the right IDR plan, you can use the Education Department's Loan Simulator. This tool can help you compare different plans and find the one that best suits your financial situation. It is also advisable to set an early reminder for the renewal of your IDR plan each year.
If your IDR payment is still too high, you may want to consider asking your servicer about deferment or forbearance. Forbearance can provide immediate relief from stress caused by loan payments. However, it is important to remember that forbearance and some deferment options will increase your principal balance and monthly payments due to interest and capitalization. Therefore, it is recommended to pay off your interest during any pause in payments to avoid it compounding.
Additionally, if you are in the military or work for a government or nonprofit organization, you may be eligible for public service loan forgiveness. There are various options available for repaying federal student loans, and it is important to review and compare them to find the one that aligns best with your financial situation and goals.
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Loan forgiveness
Yes, it is possible to pay off federal student loans during school. There are several options for repaying federal student loans, and it is recommended to learn about these options, get expert help, and create a plan for repayment. One option to consider is an income-driven repayment (IDR) plan, which can reduce monthly payments to as low as $0. IDR plans base the monthly payment on income and family size, and the remaining balance may be forgiven after a certain number of payments over 20 or 25 years.
- Public Service Loan Forgiveness (PSLF): This program is for those who work full time for a government or not-for-profit organization. If you qualify, you may be eligible for forgiveness of the entire remaining balance of your Direct Loans.
- Teacher Loan Forgiveness: Teachers who work full time for five complete and consecutive academic years in certain elementary or secondary schools serving low-income families may be eligible for forgiveness of up to $17,500.
- Total and Permanent Disability (TPD) Discharge: If you have a physical or mental disability that severely limits your ability to work now and in the future, you may qualify for a TPD discharge, which means you don't have to repay your federal student loans.
- Military Service Member Benefits: The U.S. Department of Education and Department of Defense offer special benefits for military service members with federal student loans.
- Closed School Discharge: If your school closes while you are enrolled or soon after you withdraw, you may be eligible for a discharge of your federal student loan if you meet certain requirements.
It is important to review the specific requirements and eligibility criteria for each loan forgiveness program to determine if you qualify. Additionally, consider using the Education Department's Loan Simulator to compare plans and find the best option for your situation.
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Frequently asked questions
Yes, you can pay off your federal student loans early. You can choose to make in-school payments or defer them until after graduation.
Paying off your federal student loans during school can save you money in the long run. This is because interest accrues on unsubsidized federal loans and private loans while you are in school. By making small payments, you can reduce the total cost of your loan. Additionally, making on-time payments can boost your credit score.
You can choose to make monthly interest-only payments while in school. You can also make a lump-sum interest payment before your grace period ends.
If you have a federal loan, interest will accrue while you are in school and during your grace period. This interest is then capitalized, meaning it is added to your principal loan amount. As a result, you will pay interest on a larger amount, increasing the total amount you pay over time.
If you cannot afford to make payments, you can consider deferment or forbearance. With deferment, you may qualify to pause your payments, but you will need to pay off the interest during this time. Forbearance also allows you to pause payments, but interest will continue to accrue, increasing your principal balance and monthly payments.
