Should I start paying off my student loans while still in school?

You heard through the grapevine that you should pay off the interest on your student loans while you’re in school. It sounds right. You don’t want interest to capitalize, right?

Well, it depends. A couple things to consider:

• Subsidized vs. unsubsidized loans. Only unsubsidized loans accrue interest while you’re in school.
• How you plan on paying for the interest. Is it savings, family or taking additional loans?

Let’s take a look at an example:

Martha needs to borrow $10,000 per semester to pay for tuition and living expenses. She’s a full-time student in a 2-year program and makes $5,000 a semester from working at the library coffee shop.

Option 1: Keep the cash

The first disbursement will be for the Fall 2017 semester for $10,000. $3,000 is subsidized and $7,000 is unsubsidized. So, only $7,000 will accrue interest while in school.

Over the course of two years, she will need $40,000, $12,000 of which is covered by subsidized loans. The $28,000 of unsubsidized loans will end up with a balance of $2,583.61 in interest when she graduates.

We’re assuming a 6.8% interest rate for all semesters, 5 month long semesters and 2-month long summer breaks.

Option 2: Use cash to pay for school (and lower borrowing)

Even though Martha can’t pay all of her unsubsidized loans off with her summer income, by putting $5,000 towards them each semester she will only have $20,000 in student loans when she graduates and $738.17 in interest – saving her $1,845.44.

We’re assuming a 6.8% interest rate for all semesters, 5 month long semesters and 2-month long summer breaks.‍

But wait… those payments don't count towards public service loan forgiveness.

Generally, using cash to pay for school and take less debt makes sense. Unless however, you plan on using public service loan forgiveness. Payments made while in school don’t count towards public service loan forgiveness. If you’re planning on using this program, you need to pay as little as possible over the life of your loans, and should not make extra payments to pay down interest. Instead, you should save extra money you earn while in school. If Martha is thinking about using PSLF, she would choose option 1 and not pay extra towards her loans.

Option 3: Use new loans to pay interest from previous loans

If Martha took out more unsubsidized loans to pay off the previous semesters interest balance, she would have $41,397.50 in federal loans when she graduates and $1,186.11 in interest  –  the exact same amount she would have is she did not take out more loans. She’s only able to save money with this option if the interest rate on the new loan is lower than then previous rate. In short, she would use lower interest loans to pay higher interest loans.

We’re assuming a 6.8% interest rate for all semesters, 5 month long semesters and 2-month long summer breaks.

For most, using student loans to pay off the accrued interest of previous loans sounds good but yields limited savings.

Paying down accrued interest while in schools sounds like a great strategy; however, there are multiple factors to consider  –  PSLF, earned income, and interest rates. Your situation is unique and it’s important to map out the tradeoffs for the options above. Regardless of which strategy you choose, we’re confident you’ll survive student loans!