Many families rely on a number of resources to finance their kid’s education and private student loans are a powerful tool when used correctly. Before your student signs that promissory note, be sure they understand the implications of interest on the total cost of their loan. With a private student loan, interest begins to accrue as soon as the money is sent off to their college so making payments while a student is enrolled (even if they’re not required) can help students save considerably on the cost of the loan. In fact, even paying $20 a month toward interest while in school can save them hundreds in the long run.
“If you’re anything like me, you probably consumed your fair share of instant noodles while trying to survive on a college student’s budget. Trust me, I get it. But one thing I really regret when it comes to my student loans is not paying interest while I was in school or during my grace period…I probably could have spared a few dollars each month to pay down some student loan interest.” -Nicole Callahan, HomeRoom (The official blog of the U.S. Department of Education)
With iHELP®, there are 3 repayment options for students while enrolled in school.
The total amount your student will pay for a loan depends on when they start to repay it. While enrolled at least half-time in school, students can elect to:
- Make no payments: Students can defer from making any payments at all while enrolled in school. Borrowers also have a 6-month grace period after graduation or dropping below half-time enrollment before payments are required. From the time the loan is disbursed, interest is accruing and will be added to your balance when your grace period ends. This is the repayment option that borrowers are automatically set up with.
- Pay only the interest: Students can request to make interest-only payments, but defer payments on the principal amount while enrolled in school. It is important to remember that once a student picks their repayment plan, they must stick with it. If there isn’t room in the budget to make monthly payments, students should opt for the deferred repayment option and pay what they can afford while in school.
- Make full payments: Students can request to pay both principal and interest amounts while enrolled in school. Again, students should only choose this option if they are able to make monthly payments consistently.
Take a look at this loan cost example:
Let’s say Emily, an incoming freshman, takes out a $10,000 loan in August. She qualifies for a 7% starting interest rate and plans to be in school for 4 years. Repayment will last 20 years in this example, starting with the initial principal payment. Here are her repayment options:
- Make no payments: If she defers from making any payments until after she graduates and her 6 month grace period ends, the overall cost of her loan will be an estimated $24,250.58.
- Pay only the interest: With interest-only payments throughout school, she’ll save approximately $2,610.28 on the overall cost of the loan.
- Make full payments: If she can make interest and principal payments while enrolled in school, she’ll save about $5,643.44 on the overall cost of the loan.
With an iHELP® private student loan, your student’s starting interest rate will be between LIBOR + 2.5% to LIBOR + 8.5% based primarily upon their credit history. After the starting rate is set, your student’s rate will then vary with the market. This means that their rate may increase or decrease from the rate shown in this example. The variable rate on an iHELP® student loan is based upon the three month LIBOR, which is published in the Wall Street Journal, and rounded up to the nearest one-eight of one percent, 0.125%. There are no prepayment penalties with an iHELP® private student loan.
How your student can afford in-school payments.
Even on a student’s budget, most borrowers can spare a few dollars per month toward student loan payments. The first step is determining their budget. Download the cost college calculator at the bottom of this article to get started. Students should try to budget for some student loan payment while in school. If their budget comes up short, it may be time to consider how to cut costs (ramen instead of steak) or perhaps a part time job. Once your student is ready to make payments, it is a good practice to set up automatic payments so they can get into a habit of making timely monthly payments. Managing student loans before they become due is a great step in the right direction of being fiscally responsible. Encourage your student to make in-school loan payments, they’ll thank you later.