College Students, Save $1000's in Student Loan Interest — Part 1

Current students, most likely you aren’t thinking about your student loans. I get it, there are plenty of things that occupy your mind right now. However, I’ll show you why you should and more importantly, why you should start paying them down now while you’re still a student.

Most of the student debt out there is from the federal government, approximately 92%. Your federal loans will fall under either direct subsidized or direct unsubsidized loans. I’ll first quickly walk you through the differences:

Direct Subsidized Loans

• Awarded based on financial need
• The government covers interest while in school (min half time), grace period after graduation, and deferment/forbearance period
• No longer offered for graduate students

Direct Unsubsidized Loans

• Not based on financial need
• You are fully responsible for all interest accrued
• Interest is capitalized, meaning it is added to your principal
• Higher interest rate for grad students

The big main difference between the two is that the government is responsible for paying the interest while you’re in school for direct subsidized loans. Those that have subsidized loans as part of their financial aid will have an advantage as less interest will accrue over the life of the loans.

*Accrue — to accumulate over time — most commonly used when referring to the interest, income, or expenses of an individual or business. Interest in a savings account, for example, accrues over time, such that the total amount in that account grows.

Here’s what happens with your interest while in school

Most borrowers will start paying their student loans off after the 6 month grace period ends (usually in November) once they graduate. If you have unsubsidized loans, that’s a lot of time for the interest to grow, especially for those taken out as underclassmen.

Capitalization

As that unpaid interest accrues, it is then added to your principal balance. Capitalization typically occurs after your grace period ends as you enter into repayment. It also occurs when periods of deferment or forbearance ends. This capitalized interest makes the overall amount you owe larger as interest accrues over a larger balance.

Example

The average student loan debt that college grads hold is more than $37,000. We’ll use that $37k amount as an example and see how much interest accrues for each year you borrow and hold off payment until after the grace period ends after graduation.

We’ll also use the historical interest rates for each academic year from 2017–2021 to make our interest calculations more current and accurate. Please see the table below.

By the time repayment starts, the $4,658 of accrued interest gets capitalized and added to the original borrowed amount. That’s an additional 12.59% of the $37,000 that gets piled on and interest accrues over this larger balance. More accrued interest over the life of the loans means more that needs to be paid. Your situation may be less depending on the amount you’ve borrowed and if you have some subsidized loans. If you’ve taken out more than the $37,000 example above, your accrued interest amount and capitalization may be substantially more.

Stay tuned for Part 2! In the next blog article, we’ll explore practical ways to help you potentially save $1000's in student loan interest!

AlumSum is on a mission to be the best student loan management tool you need to stay on top of all your student loans and save you time and money on paying them down. Please join our email list here to become one of our first users.

Students, you may not have experienced budgeting yet, but when you join our Early Access email list, you will also get a link to a sample Google Sheet Budget based on my personal monthly budget. This can be a great way for you to know how much money is coming in and out so that you can put money towards paying that accruing monthly interest while you’re still in school. You can copy and save the sample, then change the categories of expenses to better suit your situation. I encourage you to start budgeting as it is one of the first building blocks to becoming financially responsible.

Thanks for reading and stay tuned,

James