The Real Cost of Student Loans (& How You Can Minimize Them)

Taking out a student loan can seem like an excellent way to fund post-secondary education—especially if you don’t have heaps of money lying around in a savings account or trust fund. But while student loans can certainly make higher education more accessible to many people, they can also create significant amounts of debt. As a result, many graduates find themselves struggling to make payments once they’ve graduated, severely impacting their quality of life while they’re trying to enter a competitive job market. So what can you do to make things easier?

It all starts with understanding what taking out a student loan really costs. Once you understand that, you’ll be able to strategize more effectively to ensure that your bases are covered. Below, we break down the hidden costs of student loans, explain different kinds of interest, and provide ideas for minimizing these costs.

Student using calculator to figure out monthly student loan payments

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The Hidden Costs of Student Loans

Did you know that other lenders offer different terms depending on whether or not a person has outstanding student loans? In fact, they’ll even look at the amount of debt you have and sort you into one of three categories: low, moderate, or high.

People with high student loan debt pay higher rates for other credit products (like credit cards, mortgages, and auto loans) than people with moderate or low student loan debt. The average total extra costs are as follows:

  • Low Debt: $13,452
  • Moderate Debt: $29,066
  • High Debt: $29,495

In plain english, taking out a student loan makes borrowing money in almost any other significant way more expensive. And not just a little, either—we’re talking tens of thousands of dollars here. That’s why getting a loan with favorable terms and having a clear plan to pay it back is so important—it prevents you from getting gouged elsewhere for years to come.

Woman explaining student loan interest to man near laptop

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How Does Student Loan Interest Work?

Things would be tricky enough if we only had to worry about the principal on student loans—but unfortunately, that’s not the case. You’ve also got interest to consider.

Simple interest is based solely on the amount of your principal, but many student loans don’t work that way. Here’s an overview of different interest types and terms commonly used for student loans:

Deferred Interest

Deferred interest loans mean that the interest payments on the loan aren’t due until later. This can feel like an interest-free loan to borrowers—until it’s time to start making the interest payments.

Here’s the thing: when interest payments are deferred, they get added back to the loan. For example, if your regular payment with interest would be $400 but you only pay $300 because you defer the interest, then $100 is getting added back to the loan. If you’re unable to get an extension for your loan, that means your minimum payments will actually increase over time—and you might find yourself with a hefty lump-sum payment to make at the end of your term.

Fixed Interest

Federal student loans often come with fixed interest rates—meaning that they stay the same throughout the entire term of the loan. This can be more secure than a student loan with variable rates during periods of economic volatility, but fixed interest rates also tend to be higher from the outset than variable ones. If market conditions improve as you’re paying back your loan, a fixed rate can actually end up costing you more money.

Interest Only

One strategy for dealing with student debt is to make interest-only payments before you graduate or during your grace period. Since interest accrues on private and unsubsidized student loans while you’re still in school, making interest-only payments can prevent these amounts from being added to your loan balance before you graduate and are required to start paying down the principal.

Making interest-only payments is smart if you can afford to do it, and can save you thousands over time.

Full Principal + Interest

Some loans give you the option to make full principal and interest payments. This means your principal gets split into equal monthly payments, with interest calculated based on the total remaining amount.

Structuring your student loans this way means your monthly payments won’t decrease over time—but your interest and total debt will. It will be a bigger financial commitment at first than deferring your interest, but you’ll often end up owing less in the long run.

Stack of coins in front of clock to symbolize making payments over time

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How to Minimize Your Interest and Total Loan Costs

The rule of thumb with student loans is: the more you can pay while your loan is still new, the less debt you’ll be in later. But of course, that’s not an option for everyone—if you were rolling in dough, you wouldn’t need a loan in the first place!

Here are some smart ways to control your student loan and interest costs:

  • Set up automatic payments for your loans to avoid missing them
  • Make interest-only payments while you’re still in school
  • Don’t opt for deferred interest unless you absolutely have to—it’ll hurt later
  • If possible, choose loans with a full principal and interest option instead of a fixed rate (this may mean considering private loans instead of federal student loans)
  • Use a student loan calculator to predict your debts and structure your payments effectively—this useful student loan calculator from Earnest can help you

Get Smart about Student Loan Debt

Making a plan to manage your student loans early will help you avoid large amounts of long-term debt. In turn, owing less on your student loans will reduce the amount you pay on other credit products after you graduate, making it easier to get credit cards and make major purchases like vehicles or homes. For more money-saving tips, check out these 18 ways to reduce your spending or 8 ways to stretch your food budget.