When you take out a private student loan, the lender usually asks you a question that can cost -- or save -- you thousands of dollars: "Which repayment option do you want while you're still in school?" Most families pick the default without thinking twice. But the choice between full deferral, interest-only payments, and small fixed payments changes the total cost of your loan in a big way. According to Sallie Mae's "How America Pays for College" 2025 report, about 30% of families used private loans to help cover college costs in the 2024-25 school year. If your family is in that group -- or might be soon -- this guide breaks down exactly what each in-school repayment option means for your wallet.
What Are In-School Repayment Options?
Unlike federal student loans, which automatically defer payments until after you leave school, private lenders give you a choice. When you sign your loan agreement, you typically pick from three options:
- Full deferral -- You make no payments while enrolled at least half-time. Interest still adds up and gets added to your loan balance (this is called capitalization).
- Interest-only payments -- You pay just the interest that builds up each month. Your balance stays the same as the day you borrowed.
- Fixed payments (often $25/month) -- You make a small set payment each month. It covers some of the interest but usually not all of it.
Each option affects your monthly cash flow during school and your total repayment cost after graduation. Let's look at the real numbers.
How Interest Works While You're in School
Before we compare the three options, you need to understand how interest grows on a private student loan. Private loan interest rates for the 2025-26 academic year range from roughly 4% to 17%, depending on creditworthiness, the lender, and whether you pick a fixed or variable rate. According to the College Board's Trends in Student Aid data, private loan borrowing has grown steadily over the past decade as tuition costs outpace federal aid limits.
Here is the key fact: interest on private student loans starts building from the day the money is sent to your school. If you borrow $10,000 at an 8% fixed rate, you will owe about $66.67 in interest every month. Over a four-year degree, that is roughly $3,200 in interest alone -- before you make a single payment on the principal.
What happens to that $3,200 depends entirely on which repayment option you chose.
Option 1: Full Deferral (No Payments in School)
Full deferral is the most popular choice because it feels the easiest. You sign the loan, the money goes to your school, and you do not think about payments until six months after graduation.
How It Works
During full deferral, interest builds every month and gets added to your principal balance. This is capitalization, and it means you start paying interest on your interest.
Example: $10,000 Loan at 8% Over Four Years
- Monthly interest: $66.67
- Total interest during 4 years of school: approximately $3,200
- Capitalized balance at graduation: approximately $13,200
- You now repay $13,200 (not $10,000) over your standard repayment term
If you have a 10-year repayment term after graduation at the same 8% rate, your monthly payment on $13,200 would be about $160. Over the life of the loan, you would pay roughly $19,200 total -- nearly double what you originally borrowed.
Who This Option Fits
Full deferral makes sense if your family genuinely cannot afford any payments during school. Sometimes cash flow is tight, and that is okay. But go in with your eyes open about the long-term cost.
Option 2: Interest-Only Payments
Interest-only payments mean you pay exactly the amount of interest that builds up each month. Your balance never grows. When you graduate, you owe the same $10,000 you borrowed -- not a penny more.
How It Works
Each month, the lender calculates the interest on your current balance. You pay that amount. Because you keep the balance flat, there is no capitalization.
Example: $10,000 Loan at 8% Over Four Years
- Monthly interest-only payment: approximately $66.67
- Total paid during school: approximately $3,200
- Balance at graduation: $10,000 (unchanged)
- Monthly payment during 10-year repayment: approximately $121
- Total cost over the life of the loan: approximately $17,750
Compare that to the $19,200 total under full deferral. Interest-only payments save you about $1,450 on a single $10,000 loan. If you borrow $40,000 over four years (a common total for private borrowers), the savings can reach $5,000 to $6,000.
Who This Option Fits
This option works well for students who have a part-time job or parents who can cover $50 to $100 per month per loan. It is the sweet spot between affordability and cost savings.
Option 3: Fixed $25 Monthly Payments
Some lenders offer a flat $25 per month payment while you are in school. This is a middle ground -- you are paying something, but not the full interest amount.
How It Works
You pay $25 each month. The lender applies that $25 toward the interest. If your monthly interest charge is higher than $25, the unpaid portion gets capitalized (added to your balance). If your interest charge is lower than $25, the extra goes toward principal.
Example: $10,000 Loan at 8% Over Four Years
- Monthly interest: approximately $66.67
- Monthly payment: $25
- Shortfall each month: approximately $41.67
- Interest shortfall over 4 years: approximately $2,000
- Capitalized balance at graduation: approximately $12,000
- Monthly payment during 10-year repayment: approximately $146
- Total cost over the life of the loan: approximately $18,500
The $25 payment option saves you about $700 compared to full deferral. That is real money, but it is less than half the savings of interest-only payments.
Who This Option Fits
This option works if you can spare $25 a month but not the full interest amount. It is better than doing nothing, but not by as much as most people expect.
Side-by-Side Comparison
Here is a clear look at all three options for a $10,000 private loan at 8% interest over a four-year degree, followed by a 10-year repayment period:
- Full deferral -- $0/month in school, $13,200 balance at graduation, approximately $19,200 total cost
- Fixed $25 payment -- $25/month in school, $12,000 balance at graduation, approximately $18,500 total cost
- Interest-only -- $66.67/month in school, $10,000 balance at graduation, approximately $17,750 total cost
The difference between the cheapest and most expensive option is about $1,450 on just $10,000 of borrowing. Scale that up to $30,000 or $50,000 in total private loans, and you are looking at $4,000 to $7,000 or more in extra costs from choosing full deferral.
The Impact of Higher Interest Rates
The examples above use 8%, but many private loans carry higher rates. According to data from the Education Data Initiative, borrowers with less established credit histories (common among students without a co-signer) may see rates of 12% or higher.
At 12% interest on a $10,000 loan:
- Full deferral leads to a balance of roughly $16,000 at graduation and a total cost of about $23,300
- Interest-only keeps the balance at $10,000 and costs about $21,400 total
- The savings from interest-only jump to nearly $1,900 on a single $10,000 loan
Higher interest rates make the case for in-school payments even stronger. Every dollar of interest you do not pay gets added to your balance and starts generating its own interest.
Challenges to Watch
Not All Lenders Offer Every Option
Some private lenders only offer full deferral or interest-only payments. A few offer the $25 fixed payment option. Before you sign, ask the lender exactly which in-school repayment choices are available. If a lender only offers full deferral, that should factor into your comparison shopping.
Variable Rates Make Planning Harder
If you chose a variable-rate loan, your monthly interest charge will change over time. An interest-only payment that starts at $50 per month could rise to $80 or more if rates increase. Build some cushion into your budget if you go this route.
Capitalization Happens at Key Moments
Even if you make interest-only payments during school, some lenders capitalize any unpaid interest when you enter the full repayment period. Read your loan agreement carefully. Ask the lender: "Will interest capitalize when I leave school, even if I have been making interest-only payments?" The answer matters.
Co-Signer Responsibility
According to the Federal Student Aid office, most private student loans require a co-signer. If you are a parent co-signing a loan, the repayment option your student picks affects your credit too. A deferred loan with a growing balance shows up on your credit report. Missed payments -- even small ones -- can hurt both of your credit scores.
Multiple Loans Add Up Fast
Most students do not take out one loan. They borrow each year. If you have four separate private loans, each with its own interest rate and repayment option, the total monthly cost of interest-only payments can grow. A student with $40,000 in private loans at an average rate of 9% would need to pay about $300 per month to cover all the interest. That is doable for some families, but not all.
Smart Strategies for Families
Start With Interest-Only If You Can
Even if it feels like a stretch, interest-only payments are the single best thing you can do to reduce the total cost of private student loans. The math is clear. If your family can cover the payments, do it.
Switch Options if Your Situation Changes
Most lenders let you change your in-school repayment option. If you start with full deferral because money is tight freshman year, you can switch to interest-only payments when a student picks up a summer job or a parent's financial picture improves. Call your lender and ask.
Make Payments Even in Deferral
Even if you chose full deferral, nothing stops you from making voluntary payments. Any amount you send -- $20, $50, $100 -- gets applied to interest first. This slows down capitalization and saves money over the life of the loan. There is no prepayment penalty on private student loans.
Compare Before You Borrow
The best time to think about in-school repayment is before you sign the loan. Use tools like CollegeLens to compare the true cost of different loan options side by side, including how each repayment choice affects your total cost.
Frequently Asked Questions
Can I switch my in-school repayment option after I have already started?
Yes, most lenders allow you to change your repayment option. Call your loan servicer and ask about switching. Some lenders let you do this online. There is usually no fee, but the change may take one billing cycle to go into effect.
Do interest-only payments affect my credit score?
Yes, in a good way. Making consistent on-time payments -- even small interest-only ones -- builds your payment history. Payment history is the biggest factor in your credit score. Full deferral, on the other hand, does not help you build credit because you are not making payments.
What if I can only afford interest-only on some of my loans?
Prioritize the loans with the highest interest rates. Pay interest-only on those and defer the ones with lower rates. This gives you the most savings for each dollar you spend.
Are there tax benefits to paying student loan interest while in school?
You may be able to deduct up to $2,500 in student loan interest per year on your federal tax return, depending on your income. This applies to interest paid on both federal and private loans. Check with a tax professional or visit the IRS website for current rules for the 2025-26 tax year.
How do I know how much my monthly interest-only payment would be?
Take your loan balance, multiply by your annual interest rate, and divide by 12. For example: $15,000 x 0.08 / 12 = $100 per month. Your lender will also tell you the exact amount on your billing statement.
The Bottom Line
The repayment option you choose while still in school is one of the most important decisions you will make about your private student loans. Full deferral is tempting because it costs nothing today. But it costs the most tomorrow. Interest-only payments take discipline and a monthly budget commitment, but they can save you thousands of dollars over the life of each loan.
If you are a student, talk to your family about whether interest-only payments are possible. If you are a parent, think about whether covering interest payments during school is a better use of money than paying a larger total later. The numbers almost always favor paying now.
Before you borrow, compare your options. CollegeLens can help your family see the real cost of each loan choice -- including in-school repayment options -- so you can pick the path that fits your budget and your goals.
-- Sravani at CollegeLens