What to Know About Paying Student Loans While In School

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By Mark Kantrowitz

June 3, 2020

During our webinar about Student Loans 101 (Repaying), participants asked dozens of questions about deferments and forbearances, grace periods, repayment plans, tax breaks, loan discharges, loan forgiveness and default. Here are the answers to many of the questions about repaying student loans.

Questions about Payments during the In-School Period

Can a cosigner make payment on a student’s loan while they go to school? Would it be better to be a cosigner and pay through student or take a parent loan and pay outside?

There are no prepayment penalties on federal or private student loans, so nothing stops a borrower or cosigner from making payments during the in-school, grace and repayment periods.

Some lenders offer interest rate reductions to borrowers who commit to making monthly payments on their private loans during the in-school and grace periods instead of full deferment. In-school payment options may include full payments, interest-only payments and fixed payments (typically $25 per loan per month).

With a parent loan, the parent maintains more control over the loan. The parent will receive loan statements on a parent loan, but not necessarily on a cosigned loan.

On the other hand, only the parent is required to repay a parent loan, while both the student borrower and the cosigner are required to repay a cosigned student loan. In both cases, the loan will appear on the parent’s credit history, affecting the parent’s eligibility for new credit, such as credit cards, auto loans and mortgages.

With a subsidized federal loan, can you make small payments against principal while still a student, and retain the subsidy through which the government pays the interest while you are in school?

If a loan servicer receives a payment on a federal loan before repayment is scheduled to begin, the payment is treated as a prepayment and is applied entirely to the principal balance of the loan.

If such a prepayment is made on a subsidized loan, it will not affect the subsidized nature of the loan. The loan remains a subsidized loan and the federal government will continue to pay the interest that accrues during the in-school and grace periods.

However, the prepayment will reduce the principal balance of the loan, thereby reducing the interest that accrues and is paid by the U.S. Department of Education. You do not get to keep the difference from the amount of interest that would have accrued if not for the prepayment.

Strategically, it is better to apply extra payments to the principal balance of unsubsidized loans, not subsidized loans. This will save money on interest, since the interest that accrues on an unsubsidized loan during the in-school and grace periods is the responsibility of the borrower.

If a borrower has only subsidized loans, it may be better to wait until the loans enter repayment to make the extra payments. Prepayments have the same effect regardless of whether they are made during or at the end of the in-school and grace periods. It is better to wait until the end of the in-school and grace periods, so that you get the float.

Use our Student Loan Prepayment Calculator to evaluate the impact of making extra payments, showing you how much you save on interest by making extra payments and how much extra you’d have to pay to pay off your debt quicker.

With a Federal Stafford loan (in the child’s name), can a parent make a payment directly on principal while the student is in school?

Yes. There are no prepayment penalties on federal and private student loans. Generally, if a payment is made while the borrower is not obligated to make payments on the loan, the payment will be applied to the principal balance of the loan.

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