In-School Payment Options

By Mark Kantrowitz

Lenders of private student loans offer as many as four in-school payment options: immediate repayment, interest-only repayment, fixed repayment and full deferment.

Most student loans allow the borrower to defer payments of principal and interest until after the student graduates or drops below half-time enrollment status. Often, there is a 6-month grace period before repayment begins. The interest that is charged during the in-school and grace periods will be capitalized (added to the loan balance) if it is not paid as it accrues.

But, if the borrower can afford to make loan payments during the in-school and/or grace periods, it will prevent the loan balance from growing much larger than the original loan amount, reducing the cost of the loan.

Federal and private student loans do not have prepayment penalties. So, nothing stops a borrower from making payments during the in-school and grace periods. To facilitate this, some lenders offer several in-school payment options. Some lenders will even reduce the interest rate for borrowers who commit to making in-school payments.

• Immediate Repayment. Under immediate repayment, the borrower begins making full principal and interest payments during the in-school and grace periods, soon after the loan is fully disbursed.
• Interest-Only Repayment. Under interest-only repayment, the borrower makes interest-only payments during the in-school and grace periods, followed by fully amortized payments of principal and interest when the loan enters the repayment period.
• Fixed Repayment. Under fixed repayment, sometimes called flat repayment, the borrower makes a fixed monthly payment, typically $25 per loan per month, followed by fully amortized payments of principal and interest when the loan enters the repayment period.
• Full Deferment. Under full deferment, the borrower does not make any payments during the in-school and grace period. Interest continues to accrue and, if unpaid, is capitalized (added to the loan balance). The borrower begins making fully amortized payments of principal and interest when the loan enters the repayment period.