Can You Make Interest-Only Payments on Student Loans?

To save money on your student loans, you may choose to make interest-only payments while you're still in school. 

Making these payments before you graduate can help you keep hundreds or even thousands of dollars in interest from being added to your student loan balance once your repayment schedule begins. 

If you don't have subsidized federal student loans, here's what you can do to save money.

Why You Should Consider Interest-Only Payments

For most student loans, interest accrues while you're still in school. If you don't pay it, your student loan servicer will capitalize the interest once you're out of school and your six-month grace period is over. 

Interest capitalization is a process in which your student loan servicer adds the accrued interest to the principal amount of your loan. That, in turn, increases the total due on your loan, and you'll end up paying interest on top of interest in addition to your principal balance.

Capitalized interest can end up costing you hundreds or even thousands of dollars. The longer you're in school and the more debt you have, the more it'll cost you. So it's a good idea to consider a recurring interest-only payment on student loans while you're still in school.

One exception to the rule is if you have subsidized federal student loans. With this type of student loan, the federal government pays the interest while you're in school at least half time, during your six-month grace period and during future deferment periods.

Subsidized federal student loans are reserved for students with a demonstrated need for financial assistance.

When to Think About Only Paying Interest on Student Loans

Whether you're a college student, a parent or a graduate, there are some situations where it might make sense to pay interest on student loans:

• You're still enrolled in college.
• Your child is still enrolled in college, and you took out Parent PLUS Loans to help them.
• You've graduated, but you're still in the six-month grace period.
• You're on a deferment because you've returned to school.
• You've requested a temporary deferment or forbearance due to financial hardship.

To give you an idea of the potential savings, let's say you took out a $10,000 loan with a 4.5% interest rate for your first academic term in a four-year program. You won't be required to make monthly payments until six months after you graduate, but every month, roughly $37.50 in interest will be added to your balance.

That might not sound like a lot, but over four years plus the six-month grace period, that adds up to $2,025. That amount will be added to your principal balance, and you'll end up paying off $12,025 (with interest) instead of the original $10,000. 

That means a monthly payment of $125 instead of $104 and $2,930 in total interest instead of $2,437.

Of course, that's not including all of the other loans you might take out during your time in school. The more you borrow, the more of an impact that capitalized student loan interest can have on you.

How to Pay Interest on Student Loans

If you're considering only paying interest on student loans while you're still in school or during other times when payments aren't required, you can set up interest-only payments directly through your lender or student loan servicer.

If you have federal student loans, there's no specific interest-only plan you can choose while you're in school. But if you contact your servicer, you can find out how much interest is accruing every month and set up automatic payments to cover that amount. If you're not sure who your servicer is, visit studentaid.gov and log in to your Federal Student Aid account to find out.

If you're on a deferment or forbearance plan, you may be given the option to make interest-only payments during the break. If you don't, though, you can still set them up on your own.

With private student loans, you may be able to set up a specific payment plan to make interest-only payments. In fact, some lenders may require it for certain loan programs. Contact your lender directly to get the details you need to make it happen. 

Tips for Paying Interest Only on Student Loans

While it's a good idea to pay interest on your student loans while you're in school and during other periods when full payments aren't required, it can be easier said than done for many people. 

Here are some ideas to help you get the money necessary to make interest-only payments:

• Get a part-time job: Look for job opportunities both on and off campus to help you earn a little extra money. In addition to using your income to make interest-only payments, you can also use it to reduce how much you need to borrow during future academic terms.
• Work during the summer: If you don't plan to take summer classes, consider working full time to earn enough money to cover interest payments and more throughout the upcoming school year.
• Set up a budget: It can be difficult to set aside money for a certain financial goal if you don't know where your money is going. Create a budget to help you spot areas of your spending where you can cut back to make room for interest-only payments.
• Ask for help: Consider asking parents to help you cover your accrued interest. 

The Bottom Line

Making interest-only payments on your student loans while you're in school and during other deferment periods can be a smart move. If you don't, you could end up paying hundreds or thousands of dollars more on your student loan debt.  

Also, keep in mind that once you've graduated, you can also look for other ways to save on your student loans. Refinancing your student loans is another great way to achieve this goal. With Juno, for instance, we'll negotiate on your behalf to help you obtain exclusive rates and discounts that might not be available if you try to refinance on your own.