The Question
We’ve continued to pay interest while in school since the loans are unsubsidized. Is that a smart thing to do if you may go for PSLF later? We always pay even a little more than the interest.
— Heather
Welcome to the Friday mailbag, where we take one reader question and answer it. Have one? Send it to us — details at the bottom.
The Short Answer
My general answer is no. Families shouldn’t pay the interest on federal student loans while the student is still in school, and that’s doubly true when Public Service Loan Forgiveness is a real possibility. I’d stop the extra payments and put that money to work somewhere else.
There are two reasons behind my answer. The College Investor estimates that about half of federal borrowers qualify for some type of total or partial forgiveness. That includes everything on our full list of student loan forgiveness programs, from PSLF to time-based forgiveness to disability discharge. Anything you pay before it’s due is potentially wasted money.
And the second reason is that that extra money will probably grow more and be worth more if you start investing it while in college.
| Loan Type | Forgiveness Path | Pay Interest In School? |
|---|---|---|
| Federal Unsubsidized, PSLF Possible | PSLF after 120 payments | No, Invest It |
| Federal Unsubsidized, Other Careers | RAP, disability discharge | No, Invest It |
| Private Student Loans | Employer assistance only | Trade-Off |
| New Parent PLUS Loans | None | Yes, Repay Now |
Would you like to save this?
We'll email this article to you, so you can come back to it later!
Why Paying Interest Early Can Backfire With PSLF
First, if you’re getting loan forgiveness through programs like Public Service Loan Forgiveness, paying interest is effectively wasting money.
PSLF forgives the remaining balance after 120 qualifying monthly payments made while working full time for a qualifying employer. Payments made during in-school deferment don’t count toward those 120, because the loan isn’t in repayment yet. For loans borrowed on or after July 1, 2026, the Repayment Assistance Plan is the income-driven plan that keeps PSLF open.
That means Heather’s extra payments do one thing. They lower a balance that PSLF would erase anyway, which turns real dollars today into zero benefit later. Paying more than what’s due can also create paid-ahead status that causes problems with loan forgiveness, so it’s worth watching once repayment starts.
How Much Interest Do You Actually Save By Paying In School?
Federal student loans use simple interest, so the amount you accrue in school is not as much as most people realize. While the student is in school, interest builds only on the principal, never on unpaid interest. On unsubsidized loans, that unpaid interest does capitalize when the deferment ends, so it gets added to the balance once repayment begins.
Here’s the math at today’s rates. New undergraduate Direct Loans carry a 6.52% fixed rate for 2026-27, so a $5,500 freshman-year loan accrues about $359 a year. A dependent student who borrows the full annual federal loan limits of $5,500, $6,500, $7,500, and $7,500, all unsubsidized at that rate, would accrue roughly $4,200 by graduation.
Once that $4,200 capitalizes, it adds about $274 a year in interest at 6.52%. That’s the real cost of not paying as you go. If PSLF forgives the balance, every dollar of it would have been forgiven anyway. Our student loan calculator can run the numbers on your own balance.
What Should You Do With The Money Instead
Invest it. If you’re a parent who wants to help, or a student with a little extra cash, I’d rather see that $400 or $500 a year go into an investment account that grows. A student with earned income can open one of the best IRA accounts and fund a Roth.
The long-term difference is large. As a hypothetical, about $2,000 invested by graduation and left alone for 40 years at a 7% average annual return grows to roughly $30,000. Use our Investment Calculator to see the impact of even $500 per year invested at 18 – it’s massive.
Should You Pay The Interest Each Year Or Invest It?
I still wouldn’t pay the interest, and investing the interest the year it accrues makes the case even stronger. Freshman-year money gets about 13 years to compound by the time a 10-year repayment ends.
Here’s how the year-by-year math works on the full dependent loan limits at 6.52%. The interest runs about $359 in year one, $782 in year two, $1,271 in year three, and $1,760 in year four, for a total of roughly $4,173. Under PSLF or the Repayment Assistance Plan, the payment is based on income, so the capitalized interest never raises the monthly payment anyway.
Invested at a hypothetical 7% return, that $4,173 grows to about $8,765 by the end of a 10-year repayment.
Without forgiveness, capitalizing $4,173 raises a 10-year Standard payment by about $47 a month, or $5,691 over the life of the loan. The fair comparison is paying the interest each year and investing that $47 a month later, versus investing the interest each year and letting it capitalize.
| Scenario | Pay Interest, Invest $47 A Month Later | Invest The Interest Each Year | Investing Comes Out Ahead By |
|---|---|---|---|
| Standard Plan, 4% Return | $6,983 | $6,413 | -$570 |
| Standard Plan, 6.52% Return | $7,995 | $8,342 | $347 |
| Standard Plan, 7% Return | $8,208 | $8,765 | $557 |
| Standard Plan, 10% Return | $9,715 | $11,887 | $2,172 |
| PSLF Or RAP, 7% Return | $0 | $8,765 | $8,765 |
The break-even return is about 5.7%, which is below the 6.52% loan rate because of those free years in school. Stocks have delivered the highest average return of any major asset class over long periods, which is why I’d invest.
No single 14-year stretch is guaranteed, and a family that wants zero risk can hold the money in a high-yield savings account and pay off the interest before the grace period ends.
Exception 1: Private Student Loans
Private student loans don’t qualify for federal student loan forgiveness programs. Your only real outside help is an employer repayment benefit, and only about 14% of employers offered student loan repayment assistance.
Paying private loan interest in school can help, especially since most private lenders add unpaid in-school interest to the principal when repayment begins. Check your promissory note to see how your lender handles it. Depending on your interest rate, I’d still probably rather see you invest, and our list of the best private student loans shows where rates sit today. This one is a trade-off.
Exception 2: Parent PLUS Loans
Parent PLUS loans are the clearest case for paying early. New Parent PLUS loans disbursed on or after July 1, 2026 can only use the Tiered Standard plan. They have no access to RAP and no path to PSLF.
We’ve covered why Parent PLUS loans are ineligible for income-driven repayment plans for years, and the new rules close the last workarounds for new loans.
These are the parents’ loans. My preference is immediate repayment while the student is in school, not deferring the payments. Paying early stops the balance from growing, and it clears the debt sooner so more money can go toward your retirement savings order of operations.
From a financial planning and estate planning standpoint, kids shouldn’t be helping repay a Parent PLUS loan. You shouldn’t take money from a 22-year-old to pay your 60-year-old self. You likely don’t have a longer lifespan than your child, and when you pass away, you might be sending them assets. Taking money from them at 22 to potentially give it back at 40 or 50 is really bad financial planning. That same money could be compounding in your child’s own Roth IRA the whole time.
The Bottom Line For Heather
If PSLF is a realistic goal, stop paying the interest and redirect that money into savings or investments for the student. In-school payments don’t count toward PSLF, and she can still clear the accrued interest before it capitalizes if her plans change.
Heather gives up very little by waiting, and she can always compare repayment plans once the first bill is close.
FAQs
Do Payments Made While In School Count Toward PSLF?
No. PSLF only counts payments made while the loan is in repayment under a qualifying plan like RAP count. Payments made during in-school deferment or the grace period lower the balance but don’t add to the 120-payment count.
Does Unpaid Interest On Unsubsidized Loans Capitalize After Graduation?
Yes. Unpaid interest on Direct Unsubsidized Loans capitalizes when the in-school deferment ends. Paying off the accrued interest before the grace period ends keeps it from being added to the principal.
Should Parents Pay Interest On A Parent PLUS Loan While Their Child Is In School?
Yes, in most cases. New Parent PLUS loans have no RAP or PSLF option, so there’s no forgiveness to wait for. Paying while the student is in school keeps the balance from growing.
Send Us Your Question
Got a student loan, financial aid, or money question you can’t get a straight answer on? Send it to us and we may answer it in a future Friday mailbag.
Reader Mailbag
Editor: Colin Graves
Robert Farrington is the founder of The College Investor and is widely recognized as one of the nation’s leading voices on student loan debt and saving for college. He holds an MBA from UC San Diego Rady School of Management and has spent over 15 years researching, writing, and advising on student loans, 529 plans, financial aid programs, and saving and investing for young professionals.
Robert has been featured in the The New York Times, The Wall Street Journal, The Washington Post, NBC News, and Forbes, where he has been a regular personal finance contributor for over a decade. His work combines both professional expertise and personal experience – he successfully navigated his own student loan repayment journey and has helped thousands of readers do the same.
He is committed to making the intersection of personal finance and education transparent and accessible. You can learn more about Robert on the About Page or on his personal site RobertFarrington.com.