After graduating with their BA, 70 percent of students have education debt. But it’s not just the grads who have to worry about managing what they owe.
Currently-enrolled students are worrying more and more about the debt they’re racking up for the sake of education and job prospects. If you’re one of these students, then the first step is learning more about how student loans work.
You can use that knowledge to attack your debt even before you graduate college. Let’s start with the basic requirements.
Do you have to pay student loans while in school?
Short answer: No, most student loan agreements do not require payments while the borrower is in school.
This goes for both federal and private student loans. However, private student loans may have different terms. Make sure to read carefully before you sign.
You also don’t have to pay your student loans until six months after graduation (or dropping below half-time enrollment). This is due to an automatic deferment.
What deferment is and how it works
Deferment is a period of temporary relief from loan payments. There are two types: automatic and requested.
Referred to as a grace period, the automatic deferment is a six-month period that occurs after graduation or when you drop below half-time enrollment. If you pick up more classes and resume at least half-time enrollment before the six months are up, the grace period will reset.
Requesting deferment is not automatic and is only available in specific circumstances, such as proven financial hardship or military deployment. You must manually request this type of deferment and prove you meet the requirements.
What if I drop classes?
Dropping a class is sometimes necessary if your workload is just too much. Fortunately, dropping a class or two over the course of your studies shouldn’t affect your ability to use student loans.
Just make sure you don’t drop too many classes and fall below half-time enrollment. The grace period starts and your payments will be due in a matter of months. However, if you re-enroll before the six-month grace period is up, then the grace period will reset.
Every institution is different, so check with your financial aid office to see what qualifies as half-time enrollment before you drop a class.
Note: This is different for PLUS loans because they technically don’t have a grace period (unless you took them out as a graduate or professional student).
What if I take a semester off?
As long as your break doesn’t exceed six months, you won’t be required to start repaying your loans. If you need longer than six months, you can request deferment, but you must meet the requirements.
What if I am a grad student with undergraduate student loans?
If you choose to go to graduate school at least half-time, all student loan payments – including your undergraduate ones – will be deferred. This includes Parent PLUS loans that your family may have taken out to help you.
This doesn’t mean interest will pause, though. Interest will continue to be applied to your undergraduate student loans as you go through grad school.
How student loans accrue interest while you attend school
The principal of a student loan is the amount of money you borrow before any interest is applied. The interest rate is applied to the unpaid principal amount and adds money to what you owe as time passes. Think of it as the cost of borrowing that original sum of money.
Interest rates on student loans vary according to when you borrowed and the type of loan. For example, the interest rate on a Graduate Direct PLUS loan is much higher than on a Federal Direct Unsubsidized Loan.
Current interest rates
According to StudentAid.gov, current student loan interest rates are as follows:
- Direct Subsidized Loans and Direct Unsubsidized Loans (Undergraduate): 4.99%
- Direct Unsubsidized Loans (Graduate or Professional): 6.54%
- Direct PLUS Loans (Parents and Graduate or Professional Students): 7.54%
These are fixed interest rates, which means they will not change during the life of the loan.
What about private student loan interest?
Bankrate gathered the average private student loan interest rates for 2022, and the results had a wide range. While some private loans could have a variable APR as low as 0.94%, others could have a fixed rate of 12.78%.
Be very careful when considering private student loans. Not only can their interest rates be much more volatile, but they are also ineligible for any federal student loan repayment programs.
Compounding interest
Student loans have compounding interest. This means interest charges are added to the principal and used to calculate the next round of interest charge. In essence, it’s charging interest on interest.
This is one of the many reasons it’s essential to start paying as soon as possible. The less your balance, the less interest that can be compounded.
Will student loans affect my credit score while I’m in school?
Student loans will show up on your credit report as new accounts, but that’s it. If no payments are due, your credit score should remain mostly unaffected by the loans.
If you have private loans that require payments during school, that’s a different story. On-time payments can positively affect your credit score, but missing payments will damage your credit history and likely lower your score.
Read more about how your credit score is affected by student loans
How to manage student loans while in school
When you’re in school, the last thing you want to worry about is the debt you’re taking on to keep studying. But avoiding it until after graduation will only make it worse.
Start by managing how much you borrow, then see how much you can afford to pay while you’re still working toward your degree.
Take out as little as possible
This should be your goal with any loan, not just student loans. It will look different for everyone, and there is no one right way to minimize your loans.
Here are some possibilities that may apply to your situation:
- Live at home instead of on campus.
- Take on a work-study position or part-time job.
- Enroll in only one or two classes at a time.
- Go to community college for your general education requirements before transferring to a four-year university.
Add loan payments to your monthly budget
For many, college is an awkward in-between phase after living at home and before living on your own. You may not have had to budget while living with family, but it’s essential as a college student.
Use this guide to make your budget. Then evaluate how much you can afford to pay toward your loans each month. Even if it’s only $20 (or less), making loan payments a habit now will make it easier later.
Set automatic payments
If it fits in your budget comfortably, set up automatic monthly payments through your loan servicer so you don’t even have to think about it. You can usually do this in the servicer’s online portal.
Making a post-graduation plan
Even if you’re paying as you go, you’ll likely have a sizable amount of debt left after you graduate. Get ahead by making a post-graduation payoff plan.
Build a new budget
Your finances will drastically change after you graduate. Prepare before you get your diploma so you’re not blindsided by your new situation.
If you have a job lined up after graduation, use your expected salary to determine your monthly income and expenses. And just because you don’t have to pay for six months after graduation doesn’t mean you shouldn’t. Start making payments as soon as you graduate. Interest still applies during deferment and you can start making a dent ASAP.
If you don’t have a job lined up, make a six-month plan to apply for jobs and make extra cash during the grace period. Your future self will thank you.
Explore your repayment options
A standard repayment plan is the default, but it’s far from the only option for repaying your student loans. Before you graduate, talk to your school’s financial aid office about different kinds of repayment plans and what might work for you.
You may also be eligible for student loan forgiveness programs depending on your career field. For example, healthcare and teaching both have loan forgiveness programs – albeit with very strict requirements.
Refinancing your student debt may also be an option. This usually means consolidating your federal student loans into one private loan with a lower interest rate.
