Want cheaper college? Pay interest while in school

A typical four-year degree can cost $115,000 or more, according to a 2023 College Board report. Borrowing money to pay for college adds to the total cost, due to interest.

Federal student loan interest rates range from 6.53% for undergraduate borrowers to 9.08% for parents. Private student loans have an even greater range, and the rate you get generally depends on your credit.

To lower the overall cost of your education, consider making optional student loan payments while you're in school or during your grace period. Even if you can only afford a small amount, every payment you make will decrease the amount of interest that accrues. You could save thousands over the life of your loan.

"Interest begins accruing on most private student loans and some federal student loans as soon as students receive the money, even if payments aren’t due," says Jill Desjean, senior policy analyst with the National Association of Student Financial Aid Administrators.

The impact of making student loan payments while in school

Paying even small amounts while you're in school can add up. Consider this hypothetical example: Let's say you take out $10,000 your first year of school at 6.53% interest on a 10-year repayment term. Here's how different repayment amounts impact your total savings:

• If you don't make in-school payments, you'll pay $141 per month once your repayment period starts. By the end of your repayment term, you'll pay a total of $17,653.
• If you pay $100 per month while in-school, you'll pay $86 per month once your repayment period starts. By the end of your repayment term, you'll pay a total of $15,686 — a savings of $1,967.

If you have multiple loans and can't afford to make payments toward all of them, pay the one with the higher interest rate first, says Amy Lins, vice president of customer success with Money Management International, a non-profit financial education agency.

Making payments will also help you avoid the effects of capitalization — where interest is capitalized and added to your principal balance.

When should you skip in-school payments?

Depending on your circumstances, making in-school payments may not make sense. If you fit into one of the following groups, you may be better off deferring your payments until you leave school and your grace period ends.

You can adjust your budget

If you find that you can afford to pay $50 or more per month, you may need to rethink your budget and approach to borrowing.

"While making payments during school can save student loan borrowers money, the cheapest option is to not borrow at all because of loan origination fees," Desjean says. "If you’re in a position to make payments on your loans during school, examine whether you can use that extra money to pay for school expenses directly without borrowing."

Similarly, if you borrow money, the school will send you a check for the excess amount after covering your tuition and fees. But according to Robert Farrington, founder of The College Investor, those excess dollars are an opportunity to reduce your debt.

"I would always encourage you to minimize lifestyle expenses," he says. 

You're pursuing loan forgiveness

If you're planning on working as a teacher or for a non-profit organization, you may qualify for loan forgiveness under Public Service Loan Forgiveness (PSLF), so making extra payments may not make sense.

"If you're working in public service and qualify for PSLF, you could end up a lot wealthier in life by paying as little as legally allowed on your loan and receiving loan forgiveness," Farrington says.

You have other debt

Your student loans may not be the only form of debt you have. And if you have other debt with higher rates, it may be financially wise to target the highest-interest debt first.

You have subsidized federal student loans

If you have subsidized federal student loans, which are available to students with financial need, interest does not accrue while you’re in school or during your six-month grace period. If you have this type of loan, your balance won’t be larger upon leaving school than it was when the loan was disbursed.