If you can you should always pay your interest on your student loans even when it’s in deferment or forbearance. Interest accrues daily and the higher your balance and the higher your interest rate the higher the amount applied to your loan every single day. Paying the interest during your grace period could save you hundreds if not thousands of dollars in the long run and greatly affect the amount your have to pay back when your loan comes due.
Student Loan providers are tricky and each of them handles your payments and accrued interest differently. For instance, when you have a large amount of interest accrued with Navient due to your loan being in deferment or forbearance they take that amount and add it on to your principle regardless if your loan is repayment or not. It will show up on your account as capitalized interest.
American Education Services, also known as AES on the other hand, handles things completely different. When your loan is in deferment/forbearance your interest accrues per usual however it’s never added on to your principle as capitalized interest until you enter repayment. Instead, it builds a “wall” between you and your principal. You’re probably wondering what do you mean a wall? I use the word “wall” because that’s exactly what it is, it’s a wall separating you from your principal and in order to get to your principal you have to satisfy the balance of the interest first. When I read this in their FAQ I couldn’t believe it so I called AES to be sure I was accurately comprehending what I’d read. I have an outstanding Student Loan balance with AES of over $41K. Before I could even begin to start paying on my principle I would have to pay over $3000 in accrued interest. You’re probably thinking well it doesn’t matter because you have to pay off the interest anyway and yes you’re right, but when you’re working the debt snowball the last thing you want to see is your balance not moving after you’ve just dropped a large amount towards the bill.
If my husband and I would have been making small payments of about $50 a month towards the student loan interest we could have presumably avoided this. We have other loans that are also in deferment that we won’t get to until much later on, our snowball. After taking a look at those loans I realized the interest has been capitalized on to the principle amount and our interest is making interest on itself making how much we have to pay back ridiculously larger. Did you pay your interest while in school or is the amount of interest you owe on your student loans out of control? Share your story in the comments.