Shrink Student Loan Debt By Reducing Interest.
If you think you can’t shrink student loan debt by reducing what you pay in interest on your student loan you are mistaken. I’m not talking about lowering your interest rate, but actually reducing the amount you have to pay no matter what your interest rate is.
The total you will pay in interest depends on whether or not you understand capitalization and how to avoid it. In the excerpt below you will see a simple explanation of interest and capitalization as well as the steps you can take to avoid capitalization to reduce the overall interest you will pay on your student loan.
Interest and capitalization make the amount of money you borrow bigger. Understanding how this works is important.
Interest is the cost of borrowing money. It begins to build up (accrue) as soon as you get your loan funds. The amount of interest you pay depends on many factors.
- The amount of money you borrow (principal)—the more you borrow, the more interest you’ll pay.
- The rate at which interest is charged (interest rate)—the lower your interest rate, the less interest you’ll pay.
- The length of time it takes you to repay the loan—the sooner you repay your loan, the less interest you’ll pay.
Whether or not the government helps pay the interest depends on whether your loan is subsidized or unsubsidized.
The interest rate on your private student loans is set by your lender; while the interest rate on your federal student loans is set by Congress as part of the Higher Education Act. You can learn more about interest rates and fees from Federal Student Aid.
What Is Capitalization?
Capitalization is when unpaid interest is added to your loan principal. This can happen at specific times during the life of your loan, such as when your loan enters repayment for the first time, or after a deferment or forbearance period ends. When you’re in school at least half-time or you’re in your grace period (the six months after you leave school full time) you usually don’t have to make payments on your loan. Before your first payment is due, any unpaid interest that has built up is added to the amount you borrowed (capitalized). From that point on, interest accrues on the higher balance so you end up paying interest on interest. On federal student loans, capitalization occurs only when it’s required by Department of Education regulations.
Can I Avoid Capitalization?
One way to avoid capitalization on your unsubsidized loans is to make payments on your interest before regular loan payments are required. Although not everyone is able to afford it, making interest-only payments before you begin making your scheduled monthly payment can limit the negative effects of capitalization. You can zap your interest by paying it off as it accrues, then there’s nothing left to capitalize when payment time comes.
– via My Great Lakes
Shrink Student Loan Debt By Doing Some Research
One of the best ways to shrink student loan debt is by borrowing less. Before you stop reading and think that’s a crazy idea, consider this – Many students borrow more to get their degree than they have any hope of being able to pay back given the average salary in the field in which they plan to work.
The excerpt below gives you a simple guide to follow that will help you plan before you borrow so that you will be able to pay back your student loans without a struggle. Take a look…
Know your limit. Don’t borrow more to get your degree than the salary you can reasonably expect to make in your first year out of school, recommends Mark Schneider, president of College Measures and the adviser to MONEY’s Best Colleges rankings. (MONEY’s Best Colleges rankings include estimates of student debt loads at graduation for all 665 colleges on the list.) If you stick with that rule of thumb, your payments will likely amount to no more than 11% of your gross income, which is usually considered a manageable amount, Schneider says. The key is to be realistic about your first-year salary, which is sometimes tough given that stats on how much recent college grads make are spotty beyond broad averages. CollegeMeasures.org offers the only data that breaks down first-year earnings by major, and they only have the figures for six states. To get a ballpark estimate, pick a state and school that seem similar to yours and search for the first-year earnings for your anticipated major. The MONEY rankings also include early career earnings data from Payscale.com, but the average annual salaries listed are for the first five years after graduation, not year one.
– via MONEY.com
How are you working to pay off your student loan debt?