Why You Need To (Or Should) Pay Student Loan Interest In College

July 29, 2016

One glaring aspect of student loans that people tend to overlook is the interest rate on the loan. Here are some reasons you should start paying them off sooner rather than later. If put off too long, they can be a bigger obstacle than you bargained for down the road.

Making interest payments on student loans is good idea for a couple of reasons.  While it may be a bit of a hassle for a college student, the benefits of doing so far outweigh the cons.

The first and foremost reason for paying off interest during college is to save money.  The motivation for making these payments early is to avoid capitalization.  Capitalization is when unpaid interest is added to the principal balance on a loan.  This means the principal balance increases every month which sets the stage for interest to accrue on a greater principal balance each consecutive month.

Here is a quick example of capitalization. One month there is a loan with a principal balance of $1000 and an interest rate of 5%, so $50 is accrued in interest for that month.  Next month, the principal balance is taken as $1050, so the next interest accrual comes out to $52.5.

With the previous example, it is clear how capitalization creates a snowball effect on a student loan.  If interest payments are not made during college, then new graduates may find themselves with an unmanageable loan.  Choosing to make interest payments in college helps reduce the size of this “snowball” by keeping the principal balance closer to its original disbursement value.  You can calculate your savings using this calculator. In the end, the borrower will spend less on his or her student loan; additionally, shorter repayment terms often result from this practice.

The next motivation for making interest payments during college does not yield the same fiscal return as the previous point; even so, it is just as important.  Paying off monthly interest during school fosters a good habit of making monthly payments in general.

A significant portion of student loans are not in repayment.  This means they are either dubbed as in-school, grace deferment, forbearance, delinquency, or default.  Delinquent and defaulted loans are a serious issue.  These terms mean that payments are late on a loan, and this is often a result of bad loan payment practices.

Avoiding default is important for both the borrower and the lender.  Not just for student loans either, it is a paramount for auto loans, mortgages, and credit payments.  Many borrowers fall behind on these monthly debt payments, but adhering to monthly interest payments is solid way to start a good habit for the future.

Starting interest payments in college creates multiple benefits that apply to the borrower, the lender, and the economy overall.  The borrower can form a good habit that ultimately saves him or her money in the long run.  The lender receives the desired return on investment which is the whole point from the company perspective.  Less strain is felt by the government and tax payers which benefits the economy overall.

It may seem ridiculous to say that tackling student loan interest early improves the overall economy.  At any rate, it is an excellent method to tackle any form of debt which surely contributes positively to the overall economic situation.  One of the best places to start forming these positive habits is in college where most young adults experience their first debt challenge: student loans.

About The Author

AdmitSee Staff
AdmitSee Staff

​We remember our frustration with applying to college and the lack of information surrounding it. So we created AdmitSee to bring much-needed transparency to the application process! Read more about the team here.

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