Did you know that making small payments while in school can save you thousands of dollars? Most students don't realize that interest starts accruing on unsubsidized loans the moment they're disbursed. This guide shows you exactly how much you can save.
The Bottom Line: Even paying just $50/month while in school can save you $3,000-$5,000 over the life of your loan. The earlier you start, the more you save.
Understanding Interest Accrual During School
There are two types of federal student loans:
1. Subsidized Loans (No Interest During School)
- Government pays your interest while you're in school
- Interest starts accruing after 6-month grace period
- Only available to undergrads with financial need
- No need to make in-school payments
2. Unsubsidized Loans (Interest Accrues Immediately)
- Interest starts accruing the day the loan is disbursed
- Interest accrues during school, grace period, and deferment
- Available to all undergrads and grad students
- In-school payments can save you thousands
⚠️ The Capitalization Trap: When you enter repayment, all unpaid interest gets added to your principal balance. This means you'll pay interest on the interest (compound interest). This is called capitalization and it significantly increases your total cost.
Real Example: The Cost of Doing Nothing
Scenario: 4-Year Undergraduate Degree
Borrowing:
- Year 1: $10,000 at 5.50%
- Year 2: $10,000 at 5.50%
- Year 3: $10,000 at 5.50%
- Year 4: $10,000 at 5.50%
- Total Borrowed: $40,000
If You Make $0 Payments During School:
- Interest accrued during 4 years: ~$4,950
- Interest accrued during 6-month grace: ~$1,240
- Total interest capitalized: ~$6,190
- New principal balance: $46,190
- Total interest over 10 years: $14,850
- Total amount paid: $60,850
Borrowing:
- Year 1: $10,000 at 5.50%
- Year 2: $10,000 at 5.50%
- Year 3: $10,000 at 5.50%
- Year 4: $10,000 at 5.50%
- Total Borrowed: $40,000
If You Make $0 Payments During School:
- Interest accrued during 4 years: ~$4,950
- Interest accrued during 6-month grace: ~$1,240
- Total interest capitalized: ~$6,190
- New principal balance: $46,190
- Total interest over 10 years: $14,850
- Total amount paid: $60,850
The Power of Small In-School Payments
Let's see how different monthly payment amounts affect your total cost:
| Monthly Payment During School | Total Paid During School | Interest Capitalized | Final Balance | Total Interest (10 years) | Total Savings |
|---|---|---|---|---|---|
| $0/month | $0 | $6,190 | $46,190 | $14,850 | - |
| $50/month | $2,400 | $3,790 | $43,790 | $11,680 | $3,170 |
| $100/month | $4,800 | $1,390 | $41,390 | $8,510 | $6,340 |
| $150/month | $7,200 | $0 | $40,000 | $6,530 | $8,320 |
| $200/month | $9,600 | $0 | $37,600 | $4,960 | $9,890 |
By paying just $100/month during school:
Save $6,340
That's a 43% reduction in total interest paid!
Breaking Down the $100/Month Strategy
Let's see exactly how $100/month works:
Year 1:
- Loan disbursed: $10,000
- Monthly interest: ~$46
- Your payment: $100
- Extra going to principal: $54
- Result: You're actually reducing the loan balance!
Year 2:
- New loan: $10,000
- Year 1 balance: $9,352 (reduced!)
- Combined monthly interest: ~$89
- Your payment: $100
- Extra going to principal: $11
Year 3:
- New loan: $10,000
- Previous balance: $19,220
- Combined monthly interest: ~$134
- Your payment: $100
- Interest shortfall: $34 (but still way better than $0!)
Year 4:
- New loan: $10,000
- Previous balance: $29,628
- Combined monthly interest: ~$181
- Your payment: $100
- Interest shortfall: $81
At Graduation:
- Total borrowed: $40,000
- Total paid during school: $4,800
- Interest capitalized: Only $1,390 (vs $6,190 with $0 payments)
- You saved $4,800 in capitalized interest!
- Loan disbursed: $10,000
- Monthly interest: ~$46
- Your payment: $100
- Extra going to principal: $54
- Result: You're actually reducing the loan balance!
Year 2:
- New loan: $10,000
- Year 1 balance: $9,352 (reduced!)
- Combined monthly interest: ~$89
- Your payment: $100
- Extra going to principal: $11
Year 3:
- New loan: $10,000
- Previous balance: $19,220
- Combined monthly interest: ~$134
- Your payment: $100
- Interest shortfall: $34 (but still way better than $0!)
Year 4:
- New loan: $10,000
- Previous balance: $29,628
- Combined monthly interest: ~$181
- Your payment: $100
- Interest shortfall: $81
At Graduation:
- Total borrowed: $40,000
- Total paid during school: $4,800
- Interest capitalized: Only $1,390 (vs $6,190 with $0 payments)
- You saved $4,800 in capitalized interest!
Strategies for Different Budgets
If You Can Afford $50/Month:
- Covers most of the interest on your first-year loan
- Prevents some capitalization
- Saves ~$3,000 over life of loan
- Cost: $2,400 during school
- Net savings: $770 (plus peace of mind)
If You Can Afford $100/Month:
- Covers all interest on first-year loan + reduces principal
- Significantly reduces capitalization
- Saves ~$6,340 over life of loan
- Cost: $4,800 during school
- Net savings: $1,540
If You Can Afford $150/Month:
- Covers all interest as it accrues
- Zero capitalization!
- Saves ~$8,320 over life of loan
- Cost: $7,200 during school
- Net savings: $1,120
If You Can Afford $200/Month:
- Covers all interest + reduces principal
- Graduate with less debt than you borrowed
- Saves ~$9,890 over life of loan
- Cost: $9,600 during school
- Net savings: $290 (but you graduate with $2,400 less debt!)
Where to Find the Money
Here are realistic ways students can make in-school payments:
- Part-time job: 10 hours/week at $15/hour = $600/month (plenty for $100-150 payments)
- Summer job: Save $1,200-2,400 to cover school year payments
- Work-study: Use work-study earnings for loan payments
- Internships: Paid internships can cover several months of payments
- Family help: Ask parents/grandparents to contribute to payments instead of other gifts
- Side hustles: Tutoring, freelancing, gig work
- Reduce expenses: Skip one meal out per week = $40-50/month
💡 Pro Tip: Even if you can't afford consistent monthly payments, any amount helps. Pay $25 one month, $100 the next, $0 the month after. Every dollar you pay during school saves you ~$1.50-2.00 over the life of the loan.
How to Make In-School Payments
- Log in to your loan servicer's website (Nelnet, Mohela, EdFinancial, etc.)
- Set up autopay for your chosen monthly amount
- Specify "apply to interest first" (this is usually automatic)
- Make extra payments when possible (birthday money, tax refund, etc.)
- Track your progress - watch your interest balance decrease!
⚠️ Important: Make sure payments are applied to interest first, not principal. Most servicers do this automatically, but it's worth confirming.
What About Subsidized Loans?
If you have subsidized loans, the government pays your interest during school. You don't need to make payments on these. Focus your in-school payments on unsubsidized loans only.
Calculate Your Savings
Use our free calculator to see exactly how much you'll save with in-school payments.
Calculate My Savings Now →Key Takeaways
- Interest accrues immediately on unsubsidized loans
- Capitalization is expensive - you pay interest on interest
- $100/month saves ~$6,340 over 10 years
- Even small payments help - $50/month saves ~$3,000
- Every dollar paid during school saves $1.50-2.00 later
- Part-time work can easily cover $100-150/month payments
- Set up autopay to make it automatic
⚠️ Important Disclaimer: This article is for educational and entertainment purposes only. It does not constitute financial advice. Consult with a qualified financial advisor before making decisions about your student loans.