8.16.2012

Should You Pay Off Interest On Your Student Loans While in School?

I should really be doing my crim law reading for later, but I got distracted (what else is new?). I've mentioned before that I wanted to pay off the interest on my student loans while I am in school. Subsidized loans were eliminated for graduate students as of July 2012 (I know, right before I started school) so with my unsubsidized federal loans, interest accrues right when the loans are disbursed. I have 2 loans so far - Stafford and Grad PLUS, and I will continually be taking money out until 2015. The interest has already started accruing, and it bothers me a lot.

Those who aren't financially savvy will think to themselves that they are only taking out a set amount for their unsubsidized loans. However, once interest is added, it is tacked onto your loan (principal) and then you will have to pay interest off of the initial loan amount PLUS interest!

Expensive tuition plus high interest rate plus not paying the interest while you are in school can equate to more than doubling the amount of your original loan once you finally get around to paying it all off.

I've done research on paying the interest on your student loans while in school and saw some articles stating that:

a) You shouldn't pay the interest on your loan because it is better to save it as emergency cash in a high-yield savings account; and

b) The money you are throwing at interest each month is so trivial (~$30/month) that it doesn't make much sense to do that.

I'm sure all of you in the PF community and those of you who are managing your money well are cringing at these statements. For fun, let's shoot down these arguments. Who the heck listens to advice on the internet anyway right??

My responses to the online "financial advice" -

a) My high-yield savings account is BARELY 1% right now - it sits at .8%. Now I'm sure that it makes zero sense at all to take out a loan at high (FIXED) interest rates of 6.8%-7.9% just to let it sit at a .8% savings account. I agree that one should have an emergency fund, but because I was able to save a substantial amount of money while I was working, I can cross this off of my list.

It wouldn't make sense for me to put the borrowed money anywhere since the markets are not returning anywhere near more than 7.9%. Well, maybe peer-to-peer lending, but that would be a huge risk that I'm not willing to take and I would have to deal with people who default, etc.

b) I can't even begin to think about what that person was thinking when they were handing out this advice. I feel bad for those who saw it and actually listened to it. This advice was given out in an actual forum for law students! First off, I'm not sure who pays $30 a month for interest these days on a loan for law school tuition. I calculated my interest just for this semester, and I have to pay a total of $149 a month just to pay the interest. Insane in the membrane! (Bonus points if you know what song that is from.)

Imagine if I were to not pay this $149/month this semester. Next semester I will be taking out more loans, and the interest will increase. This will happen each semester until the summer of 2015. Thinking about that just makes me want to faint.

Solutions

I previously wrote about scholarships, grants, financial aid, work-study programs, taking out less than you need, working, doing well in school, and using savings to pay for said interest. When you're in school full-time with a heavy workload, it's definitely hard to think about your finances, but I urge you to do it now while you still can.

Paying the interest on unsubsidized loans will lower your overall balance of the loan and will shorten your loan term considerably.

I honestly hate thinking about loans and depending on my job, because I "should" be focusing on school right now. Yet, this is important and even though repayment seems a bit far away from now, it will be here before I know. Why not alleviate your pain in the future by doing something about it now?

Thoughts

I'm honestly not sure why I felt so compelled to write this post today, but I hope that this struck a note with anyone in law school, med school, grad school, or even undergrad. This is the first time in my life that I've had a negative net worth, and to be honest, I'd rather not think about it. The easiest thing to do would be to just push it to the back of my head. When I first got an email from Nelnet (my loan servicer), I didn't touch it for a few days.

I thought to myself, I hate being in debt. I don't want to think about money right now, I'll deal with it later. But when you finally take the chance and take the time to look over your finances, budget, and what you can do to help yourself, you'll actually feel a lot better.

Do you have any other advice for someone with student loans?

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