Reducing Loan Payments

How to Save Money in Loan Payments

  • Borrow less and save more
  • Get a job instead of a loan
  • Stay with Subsidized loans
  • Pay while in school
  • Don't capitalize interest
  • Repay Quickly
  • Figure future payments annually
  • Resources

Borrow less and save more

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.

Lana, a junior, borrows a Federal Stafford Subsidized Loan for $2,700 at 6.8%. If she makes $50 monthly payments after graduation, she will pay the following:

  • Interest: $533
  • Total repayment: $3,233

If Lana reduced the loan to $2,000, she would save more than the $700 difference in principal. With $50 monthly payments, she would pay the following:

  • Interest: $275
  • Total repayment: $2,275

By reducing the loan by $700, Lana would save $258 in interest and reduce her repayment by $958. She would also spend less time paying off the loan—approximately 4 years instead of 5 and a half.

To supplement the $700 difference, Lana may be able to find scholarship money by searching one of several scholarship sites. Lana could also get a part-time job through the Career Services.

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.






total loan cost













Amount saved by working: $2,196

  • Option 1: Jason borrows $3,500 for the year. It will take 7 and one half years to pay it off, and he will pay $971 in interest.
  • Option 2: Jason takes a job that will earn $1,500 and borrows only $2,000. He will still have $3,500 for the year. It will take him 4 years to pay off the loan. He will pay $275 in interest.

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).

Stay with subsidized loans

Subsidized loans are offered to students who show financial need. If accepting a subsidized loan, the government will not charge the student interest until six months after the student graduates or drops below half-time enrollment. This means that, if a student borrows $2,000 now, he/she will still only owe the $2,000 upon graduation. Once repayment begins, the interest will begin accruing.

Pay while in school

After a loan credits, the federal loan processor sends quarterly bills for the accrued interest. This interest can be paid to avoid higher payments later.

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. The following chart shows two options: Payment of the interest on a loan while a student is in school, or capitalizing the interest – adding it to the principal – until after the grace period. The chart shows figures for a $3,500 unsubsidized loan at 6.8%, paid back with $50 monthly payments on a standard repayment plan. The borrower attended school for 9 months, and then had a 6-month grace period (total of 15 months).

type of interest

loan amount in School

interest charged over 15 months

interest paid during 15 months

principal to be repaid

total repayment

interest expense

not capitalized






$ 971








Difference: $527 (savings from not capitalizing this loan)

In this scenario, if a student pays the $308 of interest during the 15 months for which he/she is in school or in the grace period (about $21 a month), then it will take approximately seven and one half years to pay off the loan at $50 a month, for a total interest expense of $971.

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. It will take a little over 8 years to pay off the loan, for a total interest expense of $1,498.

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.


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 useful calculators:

Dept. of Education calculator