It Pays to Develop an Interest in Interest Part 4

A Little Interest Now, Less Debt Later

Look up your account online or call your loan servicer to find out how much interest is added each month to your student loans or calculate it yourself by using this basic formula provided by Sallie Mae student loan services:

Interest Rate x Your Loan Balance / 12 = Approximate interest accrued each month

The impact of this can be demonstrated by the following example:

  • During your first year of college, you take out a $5,500 federal Stafford loan with an interest rate of 6.8%. By multiplying .068 by 5,500 and dividing by 12, you can calculate that approximately $31 in interest accrues each month on your loan.
  • If you make no payments during your four years in college or during your six-month grace period after graduation, about $1,500 in unpaid interest would be added to make a new loan balance of approximately $7,000 at the end of his grace period. As you begin to pay down principal, interest would then be calculated on the new loan balance each month.
  • If you decide not to wait until graduation to start paying interest on your student loan, you could set up an automatic payment from your bank to pay the $31 of accruing interest each month while going to school and during your six-month grace period post-graduation. When it’s time to begin principal plus interest repayment after graduation, your loan balance will be lower than if you let the interest build up, saving you considerable money over the life of the loan.12

Graduation, an Occasion for Celebration

Knowledge is power, particularly when it comes to paying for college. And before you take out a student loan, look to maximize flexibility, and minimize overall college expenses. If you do need to take out a loan to finance college, try to pay back accruing interest while in school and during the grace period, if applicable. School loans represent real money, money that will have a real impact on your life long after college. Develop a vested interest in interest. Understand repayment schedules and the effects deferring payment can have on your overall student loan load.

Signing off on a college loan and then not thinking about it for four years is one way a student can become overwhelmed, even surprised, by debt after graduation. Be smart. College can fit your budget and lifestyle -- just don’t bury your head in the sand. That way, your graduation truly will be a cause for celebration.

12 Sallie Mae, Pay a little now, save a lot later, 2011