#interest only loan
3 Benefits of Making Interest-Only Student Loan Payments
Budgeting for interest-only payments while still in school can save borrowers money on their total student loan balance.
For many college students, borrowing student loans means they’ll be paying back principal and interest. According to the College Board, in 2012-2013 alone, more than 7 million students took out federal unsubsidized Stafford loans. a type of loan where the borrower is responsible for all accrued interest.
Interest starts to accrue on unsubsidized Stafford loans from the time they’re first disbursed. At the end of the grace period. the six months between the time a student leaves school and the first payment, the accrued interest is capitalized. This means it’s added to the principal balance and interest then starts to accrue on the new, larger balance.
Unsubsidized loan payments can be deferred until the borrower graduates or his or her course load drops below half-time, and most students choose to skip making payments while in school. But the Student Loan Ranger thinks students should still try to squeeze a loan payment into their limited budget – by paying just the loans’ interest. There are three reasons why.
1. You will save money: Let’s say you attended a one-year vocational program and took out a federal unsubsidized Stafford loan for $5,000 at a 3.9 percent interest rate. According to the Cost of Interest Capitalization Calculator over at FinAid.org, if you deferred principal and interest for 18 months, which equals the time you were in school plus the six-month grace period, the new loan balance would be $5,300.72 with accrued interest.
With the interest capitalization, under the standard 120-payment plan, after you got out of school you would pay $53.42 monthly, for a total payment of $6,410.40
If you instead opted to make interest-only payments while you were in school and during the grace period, you’d pay $16.25 a month over 18 months for a total of $292.50. Then, when your regular payments of principal and interest kicked in, your monthly payment would be $50.39 for 10 years, for a total of $6,046.80.
Combined with the $292 you already paid in interest, that means the total amount paid back would be approximately $6,339, or about $71 less than you would pay if you allowed the interest to capitalize.
2. You will develop good habits: Often, borrowers fall behind in their student loan payments because they miss the first one due after their grace period ends. Delinquency can increase the amount you owe through late fees – although most federal student loans currently don’t charge late fees, federal regulations do authorize up to 6 cents for each dollar of each installment past 15 days late.
Delinquency is also the first step toward default. However, if you align your interest-only payments with what will be your regular due date, you’ll get in the habit of parting with some money at that time.
In addition, you’ll already have a dedicated line in your budget for your student loan payments. You’ll likely have to increase that amount once your payments actually come due, however you won’t bust your budget with a student loan surprise. You’ll know that amount is coming, and you’ll hopefully plan for it by increasing your payments or decreasing your other expenses in advance.
As a bonus, you can also get a head start on automating your payments. Automatic debit is a great option for keeping your loan payments on track.
In addition, some lenders will even decrease your interest rate for choosing this option. You just need to remember to update the amount you pay each month once your grace period ends; the rest will take care of itself.
3. You will feel great: If you’re a student, you may feel like there’s not a lot you can control in your life. You can stop your student loans from feeding into that.
You can take control of your debt in many different ways, like choosing a repayment schedule that works for you. Making early payments and chipping away at that debt is another way to take charge of your money and feel like you can conquer everything the real world will throw at you after graduation.