Student loans are a powerful tool. They can help you afford college, but if you’re not careful about how much you take out and what your plan is to repay them, it’s easy to end up in a tough spot due to the interest you have to pay on your student loan debt.
Student loan interest should be a major concern for any student that takes out student loans. The more you take out to help cover tuition and other expenses, the more you’re going to have to repay once you graduate and start working. It’s important to understand how student loan interest works so that you can effectively manage your loan payments and make sure you don’t end up paying too much over the life of the loan.
What is student loan interest?
Student loans aren’t free. In exchange for getting money upfront for tuition and living expenses, you’ll have to pay your private or public a certain percentage of your total loan every year. For public loans, interest rates tend to be lower and are fixed. Private loans often carry higher rates that may depend on things like your credit score (which is why Fizz can help you pay less on your student loans).
It’s important to understand how interest is applied to your loan. Some loans are interest-only, meaning that you only pay interest payments on what you originally borrowed. Other student loans operate with a compound interest model. This means that your interest is calculated based on what you borrowed originally and the interest you’ve already accrued. This can significantly increase the total amount of money you end up paying over the life of the loan, as the amount of money that accrues interest is constantly growing. Luckily, most student loans are interest-only, but it’s important to be sure when taking out your loans.
When do you have to start paying interest on your student loans?
There are three main types of student loans: subsidized Federal direct student loans, unsubsidized Federal direct student loans, and private student loans.
With subsidized Federal direct student loans, the government will cover your interest payments while you’re still school, during the grace period, or if your payments have been paused because of unemployment or part-time enrollment in school. In short, you won’t owe interest while you’re in school, and you likely won’t owe interest until you get a job.
When it comes to unsubsidized Federal direct student loans, you’ll own interest right away - this makes subsidized loans a much better choice. With private student loans, your experience may vary depending on the terms of your loan. However, most private loans require that you begin payment immediately.
What do I need to be wary of?
Interest rates and interest payments are the price of taking out any kind of loan. But it’s important to know your options so that you don’t get stuck paying too much. Subsidized Federal direct student loans are typically the best option because they’re interest-only and you won’t need to start making payments until after college.
You should be wary of the other types of student loans, especially those that compound interest. Much like with credit card debt, compounding interest can leave you paying thousands upon thousands of extra dollars, even if you regularly make payments.
You should also be wary of loans that require you to start making interest payment immediately. If you start missing payments, you’ll be subject to additional fees and potentially hikes in the interest rate - which will increase your future monthly payments. Missing several payments can lead to default, which can negatively impact your credit score and make it harder for you to refinance or get approved for other types of loans (like a mortgage, an auto loan, or even an apartment) later on.
There’s one more thing to know about when it comes to student loan interest. Lots of student are eligible to qualify for loan forgiveness or deferment programs that can help reduce your student loan interest. These programs can be incredibly helpful, so be sure to research them and see if you qualify.
The bottom line
By fully understanding how student loan interest works, you can make sure you’re not paying more than you need to. You’ll also be in a far better position to manage your loan payments and personal finances responsibly.
Fizz is here to help as well. No matter what kind of student loans you have, Fizz can help you get a better handle on your spending and your personal finances. Plus, we’re constantly publishing resources that are designed to help answer all the questions you might have as a young adult. No more getting stuck with Google answers that don’t make any sense. We’re excited to help set you up for your financial future. Don’t wait any longer! Sign up today to get your very own Fizz card!
Sam is a Kenyon College alum and is head of content at Fizz. He's been a go to personal finance resource among his peers since getting his first credit card during his sophomore year of college. He hails from Washington, DC, loves all things aviation, and currently lives in Los Angeles.