In an interest-only repayment plan, borrowers pay back only the interest that accrues on their loan every month. This is unlike standard repayment plans. Monthly payments are used to cover a part of both, interest as well as principal.
While there are some benefits to choosing interest-only repayment plans, there are also a few downsides to this option.
The Benefits of an Interest-Only Repayment Plan
The biggest benefit of opting for an interest-only payment plan paying off the interest that accrues every month. Thus, you prevent it from being added to the principal amount. In doing this, you reduce the total interest that you would otherwise pay over the life of your loan. This can add up to some serious savings.
Another expected benefit of opting for an interest-only plan is that it forces you to save enough money every month to honor your financial obligation. Saving money will become a habit over a period of time, lowering your risk of defaulting when you have to make larger monthly payments after you graduate.
Downsides of Interest-Only Payments
By using your savings to pay off the interest while you are still in college, you may miss out on opportunities to use those funds for other purposes such as building up an emergency fund.
Additionally, this payment method only takes care of the accruing interest, not the principal loan amount. After graduation, you’ll still have to pay back the full loan cost.