By Joe Jovell, Senior Marketing Associate, Great Lakes Educational Loan Services, Inc.    

Promoting financial literacy is one of the most impactful things you can do to help encourage sensible borrowing. A key aspect of financial literacy is ensuring that students understand the benefits of making interest payments on their student loans while still in-school. By teaching them a few important things about loans and illustrating how this works with an example, you can help your students see the benefits of this practice—with far-reaching positive effects.

Interest on unsubsidized Stafford loans is the student’s responsibility from the day funds are disbursed. Payment of interest can be made during the in-school period or students can allow the interest that accrues to be capitalized when the loans enters repayment, which usually begins about six months after separation or graduation from the institution. This same option to postpone interest payments is available to student loan borrowers who are already in repayment but return to school at least half time and receive an in-school deferment.

Making no payments while in school may seem like a good option, but students can ultimately end up paying back more money over the repayment term than if they had paid the monthly interest while in school. To better understand the consequences of borrowing money, it’s important for students to understand the basic terminology.

Terms Every Student Should Know

•          Capitalized Interest: The accrued interest added to the borrower’s outstanding principal.

•          Interest: Money charged to a borrower for the use of a lender’s money.

•          Interest Rate: The percentage of a loan amount that a lender charges to borrow money.

•          Principal of Loan: The original amount of the loan.

Understanding the terminology and the value of paying interest is best explained with an example.

The information below shows the difference in the total amount a student would repay on a $15,000 Direct Unsubsidized Loan if he pays the interest as it accrues during a 12-month deferment period, compared to the amount the student would repay if he does not pay the interest and it is capitalized.

In this example, he would pay $11 less per month and $389 less altogether if he pays the interest as it accrues during a 12-month deferment period.

Aside from the cost savings, other advantages of encouraging your students to make interest payments while in school include:

• Opening the Lines of Communication – Getting the student familiar with the student loan servicer from the beginning helps to establish a relationship for successful repayment.
• Building Good Habits – It gets students in the routine of making payments and establishes a solid repayment habit.
• Automatic Payments – Students who sign up for automatic payments ensure that a payment is made each month.
• Savings – The monthly payment amount will be lower once a borrower begins principal repayment for a borrower who pays while in-school and has not yet entered repayment.

Online resources such as the U.S. Department of Education’s Federal Student Aid website and other websites such as http://www.finaid.org/ offer many useful tools and calculators to help students understand the student loan process before they enter repayment. You can also refer students to valuable online resources, such as Know Your Repayment Options, and free webinars offered by Great Lakes and other loan servicers.