When You Should (and Shouldn't) Start Paying Down Your Student Loans While In School

Student loans can be tricky. 

On the one hand, they allow millions of people to attend college — and college graduates earn twice as much on average over their lifetimes as people with high school diplomas. 

On the other hand, student debt can be stifling. The average student loan debt is now $37,693 per borrower and growing each year. 

Financially savvy students may wonder whether it’s worth it to focus on paying off student loans while still in school. The strategy can certainly save you money, but it requires careful balancing to ensure it doesn’t stretch your student budget too thin. 

This article explores the topic in-depth, helping to answer common questions about when to pay off student loans. 

Student loan basics

There are several categories of student loans, and each has slightly different details regarding interest, payment requirements, etc. 

The broad categories are:

• Federal student loans are funded by the government, and come in two types:

Subsidized federal student loans are available to qualifying students with a demonstrated financial need

Unsubsidized federal student loans are available to many students who submit the Free Application for Federal Student Aid (FAFSA)

• Private student loans are funded by private businesses, universities and banks

Interest charged on student loans compounds, which means the interest is added to the loan balance frequently. This also means that interest can grow rapidly if you don’t make sufficient payments. Compounding interest is a factor regardless of loan type. 

However, the details of how interest accrues — and when you need to start making payments — varies depending on the loan type.  The way in which interest accrues may influence your decision on when to start paying off your loans. 

When does interest start on student loans?

For unsubsidized federal loans, PLUS loans and private loans, interest starts accruing immediately after the funds are dispersed. Interest will be added to the loan balance, either immediately or after you graduate. In many cases, the accrued interest will substantially increase the amount the student owes upon graduation. 

For subsidized federal loans, interest is paid by the government until six months after you graduate. From the student’s perspective, this essentially means that interest doesn’t start until the end of the grace period.

More information on federal loans can be found here. For private loans, you can check with the financial institution that issues the loan. 

However, with many loans, you typically aren’t required to actually make payments until after you graduate. Many lenders have a six-month “grace period” post-graduation before full payments are required — so a freshman who takes out student loans likely won’t need to make any payments for 4+ years. 

Learn more about how student loan interest works here. 

Should I pay off my student loans while still in school? 

The majority of students won’t be financially capable of completely paying off their loans while still in school. So, the question becomes, when do you start making student loan payments versus wondering whether paying off the entire loan is possible or not?

If you can afford to, it’s typically beneficial to make student loan payments while you’re in school — even if all you can afford is $50 here, $100 there. 

For example, let’s say you owe $30,000 in student loans at 6% interest, for a term of 10 years. In this case, making an extra $50 payment each month would save you $1,600 in interest over the life of the loan, and you’d pay the loan off 20 months earlier. 

Even if you can only make the interest payments — which means you’ll just owe the original amount you borrowed when you graduate — this can go a long way towards improving your financial wellbeing post-graduation. 

For example, if you take out a $30,000 loan at 6% interest for a 10-year term, and you don’t make any payments until you’re required to after graduating, your debt will have grown to $39,000 by the time you start making payments. Making small payments each month to cover the interest will keep your debt at roughly the same level, making it much easier to pay off the debt later. 

If you can make additional student loan payments to lower your principal, that’s even better. In this case, you’ll graduate with a much more manageable amount of debt. 

If you don’t make any payments until you’re required to (generally six months after graduation), you’ll be faced with a substantially larger amount of debt than what you actually borrowed. 

Pros and cons of paying off student loans early

Like many things in life, there are both advantages and disadvantages to paying off student loans early. Here’s what to keep in mind: 

Pros

• You’ll pay less in interest over the life of the loan

• You’ll be less burdened by debt in your early career

• It may benefit your credit and your ability to get other loans

• It’s a way to save money in the long run (by saving on interest)

Cons

• It can prevent you from saving or investing money, which is important early in life

• It can stretch your student budget thin

• It may prevent you from spending money on enjoying college life outside the classroom 

Does paying off student loans help my credit score?

It can, but not necessarily.

In many cases, having active student loans is a positive for your credit score. Lenders like to see a positive history of regular loan payments, so a student with active loans may actually have a higher credit score than a similar student who didn’t take out student loans.

Paying off student loans in their entirety can temporarily hurt your credit score, but this is usually just for a brief period of time. On the other hand, paying off debt helps your credit in other ways. It lowers your debt to income ratio, which can make it easier to qualify for other loans. 

When you shouldn’t pay off student loans early

In what scenarios does it make sense to avoid paying off your loans early?

• If you have higher-interest debt. The average student loan interest rate is around 5.8%. Meanwhile, the average credit card interest rate is over 16% and can be much higher for some borrowers. If you have credit card debt, focus on paying this off first. Tally† may be able to help qualifying Americans pay off credit card debt faster by optimizing payoff strategies and consolidating debt. Learn more about Tally. 

• If you don’t have an emergency fund. It’s a good idea to have an emergency fund set aside to pay for unexpected expenses, medical emergencies, etc., and to cover your basic expenses for a set period of time. 

• If you haven’t started saving for retirement. Compounding interest means that investments made early in your life help build substantial wealth by the time you retire. In some cases, it makes sense to focus on starting a retirement account before aggressively paying off student loans. However, keep in mind that you may need earned income (from a job or side-hustle) in order to contribute to a retirement account. See our investment order of operations guide for more info. 

• If you qualify for a student loan forgiveness program. Do I have to pay my student loans if I qualify for student loan forgiveness? That’s a great question to ask, as student loan cancellation and forgiveness programs do exist, particularly for those going into public service or teaching. If you’re confident that you’ll qualify for one of these programs in the future, this will influence your decision. 

If you have all of the above handled, then paying off student loans early makes financial sense. 

Financial decisions like when to pay off student loans are highly individual. This guide is a good starting point, but you may wish to speak to a financial advisor if you have further questions.  †To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. Based on your credit history, the APR (which is the same as your interest rate) will be between 7.90% - 29.99% per year. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.