For many recent college graduates, there's a deadline looming: the end of the six-month grace period for repayment of federal student loans. Unfortunately, many will find this new monthly bill cumbersome, unaware that they could have reduced their loan payments by taking action before this time limit expired. 

The clock begins ticking early on
Federal student loans come in two basic types – subsidized, and unsubsidized. The former is meant for those with demonstrated financial need, and the government pays the interest costs that would otherwise accrue while such borrowers are in school, and during their six-month grace period following graduation.

The unsubsidized variety, which is available to those regardless of need, does not have such generous terms. Many students are unaware that interest charges begin to accumulate on these loans even while the borrower is in school. What's worse, those charges, if left unpaid, become part of the loan itself – and will be added to the amount upon which interest will be calculated in the future. 

Capitalized interest adds up
How much will this add to a student's debt load? Quite a lot, it turns out. The Financial Awareness Counseling page on shows how borrowing the maximum of $5,500 for a dependent student's freshman year can snowball into a repayment amount of nearly $8,200, once capitalized interest at 6.8% is added.

For undergrads, current interest rates are only 4.66%, but rates rose in July from a previous 3.86%. With student loan rates tied to the performance of the economy, next summer could see another hike, making each year's borrowing costs higher than the last. Graduate students are in a worse bind – paying rates of 6.21% on graduate school loans, as well as loans they may have incurred at the undergraduate level. As of mid-2012, graduate students have no longer been eligible for subsidized loans, and are responsible for accruing interest on any loans taken out after July 1 of that year. 

Students who took out unsubsidized loans between July 1, 2012, and June 30, 2013, are paying 6.8%, after Congress doubled the prior interest rate. For a graduate student taking out $20,000 that year in loans, paying accruing interest charges during another four years of school could shave as much as $65 per month off his or her monthly loan payment. 

Using the student loan calculator at, it is easy to see how the savings can pile up by paying interest as it accrues, even at the comparably low rate of 4.66% for four-and-a-half years.

For example, an undergraduate borrowing the maximum of $5,500 for the first year, $6,500 for the second, and $7,500 for the last two years of college would save a pretty penny on the aggregate amount of $27,000 – more than $59 per month after payments start. That's over $7,084 in interest payments saved over the life of the loan. 

What can students expect to pay each month during their college career to save this tidy sum? Using this formula, borrowers may easily estimate monthly interest costs: 

Rate x loan balance/12 months = monthly interest

4.66% x $5,500 =$21.36

For the first year of school in which the maximum loan amount was taken, $21.36 per month will cover interest accruals. If the $6,500 maximum was borrowed the following year, the new balance of $12,000 would require an increased payment of $25.24, for a total of $46.60 per month. If more money was borrowed in the third and fourth year of college, payments would need to be adjusted accordingly.

Besides saving students thousands off of their cumulative student debt burden, this payment strategy sets the stage for future personal finance skills – such as budgeting, and making small sacrifices in the present that will bring big rewards in the future. If you are planning to borrow to pay for college, adopting this method of managing your student debt might be one of the most valuable lessons you learn during your college career.