Is it smart to make interest-only payments on student loans?

The typical loan — whether it be a student loan, mortgage, or personal loan — requires you to pay toward both the interest and your loan’s principal balance on a monthly basis. Interest-only payments, on the other hand, allow you to pay only the interest that was accrued for the month, putting nothing toward the actual balance on your loan.

With federal student loans, interest-only payments are only an option when you’re in school, you’re in the six-month grace period after graduating, or you’ve been approved for deferment or forbearance. If you have a private loan, interest-only payments might be required while you’re in school, or they might be a payment plan option if you meet certain qualifications.

Pros and cons of making interest-only student loan payments

The biggest benefit of making interest-only student loan payments is that it reduces the total amount of interest you’ll pay over time.

Here’s why: Even if you’re in a grace period or otherwise not making payments toward your loan, its balance will still rack up interest month after month, year after year. That interest will compound, too, meaning it will be added to your previous loan balance, resulting in even higher interest charges on the next cycle. Making interest-only loan payments ensures this doesn’t happen.

WHY DEFAULTING ON STUDENT LOANS IS A BAD IDEA

It can also help you develop good financial habits, too. You’ll get used to making monthly, on-time payments, and you’ll be more prepared once those larger repayment bills roll around later on.

There are downsides to interest-only student loan payments, though. If you’re still in school, for example, making those payments could add financial stress — especially if you’ve taken out some hefty loans. Additionally, if you’re choosing an interest-only payment plan and you’re not in school or a grace period, it only delays the inevitable. You’ll have to pay back that debt at some point or else risk defaulting on the loan — not the mention the consequences that come with it.

How to make interest-only payments on student loans

To make interest-only payments on your student loans, you’ll need to get in touch with your servicer. If you have federal loans, you can find out who your servicer is at StudentAid.gov. In the event you have private student loans, check with your school’s financial aid office or pull your credit report. This should list who your current loan holder is.

Best ways to pay off student loans fast

The best way to reduce the interest you pay on your student loans is to pay them off — and fast. One way to do this is to consider refinancing. By refinancing your student loans, you may get a lower interest rate and thus, a lower monthly payment. If you’re successful, keep making the same payments you’re used to, and you’ll eat into the principal balance faster, shaving months or even years off your payment timeline.

5 STUDENT LOAN MISTAKES THAT CAN COST YOU THOUSANDS 

You can also:

• Make payments bi-weekly. Split your monthly payment into two and pay it out in two-week increments. This ends up resulting in a full extra payment every year, which can really whittle down that loan balance over time.
• Leverage windfalls. If you get a tax refund, holiday bonus, or birthday funds from a loved one, consider putting it straight toward your student loan balance. Make sure your servicer earmarks it specifically for your principal balance (and put it in the memo area of your check or epayment, too).
• Sign up for auto-payments. Some private lenders will reduce your interest rate in exchange for setting up auto-pay. If your lender offers this perk, take advantage, but keep making your same payments to really make a dent in that balance.

If you find yourself in a bind, federal loans offer income-driven repayment plans, which can allow you to keep paying down your loan balance, without putting too much financial stress on your household. These are better options than deferment or forbearance, as your loan still accrues interest during some of these plans.