Top Six Ways to Reduce What You Owe

Practice Smart Borrowing

The best ways to limit what you owe are to understand how much you need to borrow and to know how much you're borrowing. Here are ways you can easily estimate costs and track your student loan debt to save you some coins:

• The U.S. Department of Education can help you understand college costs and explore options for lowering them. The exit counseling tool can help you plan your school expenses for the year and estimate your projected student loan balance against your future monthly income.
• Great Lakes' budget calculator can help you manage your budget while you're in school and once you graduate. Setting a budget will help you keep track of your income and expenses to make sure you're not borrowing more than you can afford.
• StudentAid.gov receives information from all of the servicers to provide you with a full picture of all of your federal student loans, not just those serviced by Great Lakes. If you have private loans, you can usually find your lender or servicer on your credit report.
• The U.S. Department of Education's payment calculator can estimate what your monthly payment amount might be for the student loan debt that you currently have and any additional debt that you expect to borrow. Use it to help you estimate what your monthly payment might be after you leave school.

If you know what you owe as you go—and how much your future loan payments may be—you're more likely to borrow just what you need, rather than the maximum amount you can. Good borrowing decisions today mean less debt and an easier payment tomorrow.

Understand Interest to Avoid Capitalization

Interest and capitalization make the amount of money you borrow bigger. Understanding how this works is important.

Interest is the cost of borrowing money. It begins to build up (accrue) as soon as you get your loan funds. The amount of interest you pay depends on many factors.

• The amount of money you borrow (principal)—the more you borrow, the more interest you'll pay.
• The rate at which interest is charged (interest rate)—the lower your interest rate, the less interest you'll pay.
• The length of time it takes you to repay the loan—the sooner you repay your loan, the less interest you'll pay.

Whether or not the government helps pay the interest depends on whether your loan is subsidized or unsubsidized.

The interest rate on your private student loans is set by your lender; while the interest rate on your federal student loans is set by Congress as part of the Higher Education Act. You can learn more about interest rates and fees from Federal Student Aid.

What Is Capitalization?

Capitalization is when unpaid interest is added to your loan principal. This can happen at specific times during the life of your loan, such as when your loan enters repayment for the first time, or after a deferment or forbearance period ends. When you're in school at least half-time or you're in your grace period (the six months after you leave school full time) you usually don't have to make payments on your loan. Before your first payment is due, any unpaid interest that has built up is added to the amount you borrowed (capitalized). From that point on, interest accrues on the higher balance so you end up paying interest on interest. On federal student loans, capitalization occurs only when it's required by Department of Education regulations.

Note: If your federal student loans are currently in the COVID-19 forbearance (payment pause), when the pause ends, interest will not capitalize. However, if your loans were in a deferment or forbearance status before March 13, 2020 (when the COVID-19 payment pause began), your outstanding interest may capitalize after the pause ends. It depends on your individual situation. Please call us so we can look at your specific circumstances.

Can I Avoid Capitalization?

One way to avoid capitalization on your unsubsidized loans is to make payments on your interest before regular loan payments are required. Although not everyone is able to afford it, making interest-only payments before you begin making your scheduled monthly payment can limit the negative effects of capitalization. You can zap your interest by paying it off as it accrues, then there's nothing left to capitalize when payment time comes.

Make Payments While You're in School

Another way to hold down your costs is to make student loan payments while you're still in school. If you can afford it, making payments can reduce what you owe in the long run. It not only reduces your principal, but it also reduces the amount of interest that accrues on your unsubsidized loans and eventually capitalizes. How your payments are applied depends on a number of factors, but in most cases, payments are applied first to any accrued interest and fees, then to your principal balance. Learn how your payments are applied to your loans while you're still in school.

Use Auto Pay and Save

Auto Pay automatically withdraws your student loan payment from your checking or savings account on a specific date, and can help you save in a few different ways.

First, you can sign up for Auto Pay while you're still in school, which will help you get a head start on your payments and save money in the long run.

Once you enter repayment, you can receive an interest rate reduction of 0.25% on your federal Direct loan while you're making payments using Auto Pay. You may qualify for a benefit from your other lenders as well, so be sure to check with them. This reduces the total amount that you pay over time. Finally, signing up for Auto Pay also means you won't miss any payments!

Pay More than Your Scheduled Monthly Payment

When you're paying off your student loan, every little bit helps. If you can, pay more than your scheduled monthly payment when you're in repayment. The more money you're able to put toward your principal, the faster you'll pay off your loan—and the less you'll pay in the end.