Benefits of Paying Student Loan Interest in College

Isabel Grenci

In Managing MoneyIsabel Grenci

The financial decisions you make in college can significantly affect your future. College decision making doesn’t just apply to the major you choose or your college courses. One major financial decision a college student can make is paying interest on student loans while in school. Making smart financial moves in college can make your financial future easier, putting you on a path toward greater opportunities.

Let’s take a look at three benefits of paying student loan interest in college.

Saving Thousands in the Long-Run

Paying interest while you’re still in school means saving money throughout the life of your loan. When interest is charged but not paid, it becomes part of your loan balance. This increases your loan balance and could ultimately lengthen the time it takes to repay your loan. You are now paying interest on previous interest charges, in addition to the principal of your loan. It’s also important to note that this affects everyone with student loans as soon as you receive the funds, unless you only have subsidized federal student loans.

If you pay interest as it accrues, you’ll have a lower capitalized balance. This means a lower monthly payment and less out-of-pocket throughout the term of your student loan. Paying interest as it accrues can also benefit your personal finances. Additionally, you’ll have more money available each month to put toward your personal priorities.

Setting Yourself Up for Financial Success

The earlier you develop good money managing habits, the longer you will spend benefiting from them. By deciding to pay interest in college, you will get into a habit of regularly looking at your loan balance and keeping track of monthly commitments. By practicing financial responsibility in college, you will set yourself up for success when juggling more bills in the future.

Plus, reducing the impact of compound interest on your debts means more free money to save and invest. This is because unpaid interest could add hundreds and even thousands to your original loan amount. Choosing to save this money by paying interest while in school opens up various opportunities. For example, it can be turned toward savings for travel or a home, money for investments, or even funds for your retirement. Check out this article to see an example of how much money you could potentially save by paying your interest while in school. The sooner you start, the longer a period of time you’ll have to work toward your most important goals.

Developing Financial Literacy

Financial literacy is a clear understanding of financial concepts related to good financial health. Periodically, the Financial Industry Regulatory Authority (FINRA) issues a five-question test to measure consumers’ financial competency. Kristina Zucchi, author of Investopedia article ‘Why Financial Literacy Is So Important’, analyzed the results of FINRA’s most recent test. She indicates that only a third of respondents got at least four out of five questions right, concluding that more than half the test’s participants are lacking in necessary financial literacy. You can combat this by getting a handle on your financial life early. This inevitably builds your financial literacy from a young age, putting you ahead of the pack.

If you pay student loan interest while in school, you’ll potentially already have financial literacy basics under your belt upon graduation. This leaves you with room to learn financial tips and tricks as you get older. In addition, it’s a lot easier to get started in your post-grad life when you have previous experience making the right financial choices. Becoming financially savvy in college translate to making better financial decisions throughout your life.

 

In conclusion, paying interest while in college is a great way to save money, prepare you for future financial responsibilities, and develop financial literacy. These habits can help a college student in their financial, academic, and personal life. LendKey offers multiple resources to help you figure out your finances, specifically offering a pamphlet on ‘The Path to Paying for College’ which will explore saving money, starting early and additional financial options… Check it out!



Please note that the information provided on this website is provided on a general basis and may not apply to your own specific individual needs, goals, financial position, experience, etc. LendKey does not guarantee that the information provided on any third-party website that LendKey offers a hyperlink to is up-to-date and accurate at the time you access it, and LendKey does not guarantee that information provided on such external websites (and this website) is best-suited for your particular circumstances. Therefore, you may want to consult with an expert (financial adviser, school financial aid office, etc.) before making financial decisions that may be discussed on this website.