# Reducing Loan Payments

Due to the way interest works, a small change in the amount a student borrows can result in a significant savings in the total cost of the loan.

## Example

Lana, a junior, borrows a Federal Stafford Subsidized Loan and repays it when she graduates by paying $50 every month.

Principal | $2,700 |

Interest | $533 |

Total Repayment | $3,233 |

Principal | $2,000 |

Interest | $275 |

Total Repayment | $2,275 |

By reducing the loan by $700, Lana would **save $258 **(just over 5 months of payments) in interest and reduce her repayment by $958 (20 months of repayment). She would also spend less time paying off the loan; approximately 4 years instead of 5 and a half.

## Get a Job Instead of a Loan

Jason, a dependent freshman, is deciding between accepting a $3,500 Federal Stafford Subsidized Loan or taking out a smaller loan and working to supplement the difference. His interest rate is 6.8% and he expects to make $50 monthly payments after graduation.

Principal | Total Interest | Total Payment | Time for Payoff | |
---|---|---|---|---|

With Job ($1,500 in income) | $2,000 | $971 | $2,971 | 7 and a half years |

Without Job | $3,500 | $275 | $3,775 | 4 years |

In both options, Jason had $3,500. However, option 1 will cost him $4,471 in the near future--a LOSS of $971 ($3,500 - $4,471). In option 2, Jason earned $1,500, so his borrowing will cost only $2,000. He comes out $1,225 ahead ($3,500 - $2,275).

## Don't Capitalize Interest

The government begins charging interest as soon as funds from unsubsidized loans are applied to university charges. This interest can be paid while in school, or it can be **capitalized - added to the principal**.

Capitalizing interest allows a student to defer the payment of interest while in school. This can become expensive; when the interest is added to the principal, the principal increases. The next time the interest is figured, it is based on this larger principal amount, so the interest for that period is higher.

If the loan is capitalized, then the student does not pay any interest while in school or during the grace period. This interest will instead be added to the loan principal. After graduation, the interest will be figured on this higher principal.

## Repay Quickly

The sooner loans are repaid, the less interest will accrue. There is no penalty for paying most educational loans early, including the Federal Stafford Loan.

## Figure Future Payments Annually

Students can use NSLDS to see how much they have borrowed every year. Using this information, students can then calculate their expected monthly payments in the future. It is recommended that students limit their borrowing to 15 percent or less of their expected future take-home income on student and consumer debt payments.

Example: If, upon graduation, a student's income is $24,000 a year, the take home amount would be $18,720 after taxes, or $1,560 a month. The most a student should spend on debt payments towards such items as student loans, credit cards, and a car is 15 percent of that, or $234 a month.

## Resources

Some websites provide calculators to test different amounts and payment plans. When using these calculators, be sure to run the figures using the principal amount upon graduation. This means that if a student is planning to capitalize interest on an unsubsidized loan, then that student should determine the amount of interest charged while in school, add it to the principal, and use that figure in the calculator.

The following sites have loan & interest calculators: