Lana Oconnell
Paying extra on your student loan principal can save you a significant amount of money. Student loans have no prepayment penalties, so making an extra principal-only payment will lower the principal balance of your loan, and the lender will not charge a fee for paying off your loan early. However, lenders will typically apply extra payments toward outstanding fees and interest before your principal. Therefore, it is important to communicate with your lender to make sure that any additional payments are applied only to your loan's outstanding principal.
| Characteristics | Values |
|---|---|
| Prepayment penalties | Federal law prohibits prepayment penalties for any kind of student loan |
| Interest | Making extra payments on your student loans can help you save on interest |
| Lender | Lenders will typically apply extra payments toward outstanding fees and interest before your principal |
| Payment methods | Online, by phone, by mail, or by check |
| Payment options | "Other amount", "Define your excess payment preference", "Do not advance the due date" |
| Strategies | Debt snowball, Avalanche method, Biweekly payments, Autopay, Refinancing |
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What You'll Learn
Strategies to pay down principal faster
Making extra payments on your student loans can help you save on interest and pay off your loan faster—but they need to be applied only to your principal. Before making extra payments, it is important to understand the terms of your loan. Federal loans have never been allowed to charge prepayment penalties, and private student loans are banned from charging prepayment penalties as well. However, some lenders may charge fees for additional principal payments or early payoff, so be sure to ask about any extra fees.
If you are able to make extra payments, there are a few strategies you can use to pay down your principal faster. One way is to calculate 1/12 of your payment amount and add that as extra funds into each of your monthly payments. By the end of the year, you will have made one full extra payment. Another strategy is to double up on your payment when you receive a windfall, such as a tax return or a year-end bonus. You can also make two extra payments per year, which will help you pay off your loan even faster.
To ensure that your extra payments are applied correctly, you must communicate specific instructions to your lender. You can do this by specifying how you want your extra funds to be divided. For example, you can indicate that you want your extra payments to go toward the principal only. By taking these steps, you can make sure that your extra payments are applied correctly and help you achieve your financial goals.
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How to make extra payments
Making extra payments on your student loans can help you save on interest, but they need to be applied only to your principal. Here are some ways to make extra payments on your student loans:
- If you pay your student loans by cheque, include "Apply to Principal" on the memo line for any extra payments.
- If you cannot specify online how extra funds should be allocated for a given loan, call your lender directly.
- Check your online account or statements regularly to see if your lender has applied your extra money to the principal of the loan.
- If your lender hasn't applied your extra payment to the principal balance, reach out to ensure that future payments are accurately applied.
- If you are enrolled in auto-debit, the "Current Amount Due" won't be reduced in the following billing period.
- If you have accrued interest, any extra payments will go to that first. Make your principal payments immediately after your monthly payments to ensure there is no accrued interest.
- Use a student loan prepayment calculator to see how even an extra $20 a month can save you interest in the long run.
- Specify how you want your extra funds to be divided by checking your options via the servicer's online portal.
- Consider refinancing your student loans for better rates.
- List all your loans, including their remaining balances and interest rates, and decide which payment method will work best for your specific situation.
- Work on paying off your smallest balance first. This approach can be effective by eliminating one loan at a time and giving you a sense of progress.
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Prepayment penalties
There are no prepayment penalties for federal student loans or private student loans. Lenders are banned from charging additional fees when a borrower makes extra payments or pays off the loan balance early. Federal law prohibits lenders from charging prepayment penalties on all education loans. The assessment of prepayment penalties on federal student loans has been banned since the original passage of the Higher Education Act in 1965. The Higher Education Opportunity Act (HEOA) amended the Truth in Lending Act (TILA) in 2008 to ban prepayment penalties for private student loans as well.
While student loans are exempt from prepayment penalties, other types of loans do allow the lender to assess penalties. Such prepayment penalties must be clearly stipulated in the loan promissory note. Prepayment penalties are usually expressed as a percentage of the loan balance or as a flat fee. Some of the most common types of loans that assess prepayment penalties include home mortgages, auto loans and personal loans.
If you want to make extra payments on your student loans or pay them off in full, you can do so without incurring a fee or penalty. Making extra payments on your student loans can help you save on interest, but they need to be applied only to your principal. When a lender receives payments on a loan, the payment is applied first to late charges and collection costs, then to outstanding interest, and then to the outstanding principal. Any amount beyond the amount due is considered a prepayment. To ensure that your prepayments are applied to the principal balance of the loan, you may need to take a few additional steps. You can include a note with your prepayment indicating that you want it applied to reduce the principal balance. Otherwise, the lender may treat it as though you had paid your next instalment early and may delay the next payment due date.
If you have multiple loans, you may wish to specify that the extra payment be applied to a specific loan. Generally, if the extra payment is applied to the highest-cost loan (i.e. the one with the highest interest rate), you will save the most money. If you do not specify how the extra payment should be applied, the lender may apply it to the lowest-cost loan or uniformly across all your loans. Accelerating repayment of the loans with the highest interest rates first is known as the avalanche method. This method saves the most money by reducing the total interest paid over the lifetime of the loan.
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Interest accrual
To avoid this, it is possible to make extra payments on the principal of the loan. This can save money on interest and shorten the life of the loan. However, it is important to note that lenders will typically apply extra payments towards outstanding fees and interest before the principal. Therefore, it is important to communicate with the lender to ensure that extra payments are applied correctly.
One strategy for paying down the principal of a student loan is to refinance the loan for a better rate. However, refinancing federal student loans can result in a loss of certain borrower protections, such as income-driven repayment and loan forgiveness. It is also important to compare offers from multiple refinancing lenders to find the best terms.
Another strategy is to make extra payments on the loan. Federal law prohibits prepayment penalties for any kind of student loan. Making extra payments on the principal can save thousands of dollars in interest over the life of the loan. It is important to note that any accrued interest must be paid before it capitalizes to keep the total loan cost down.
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Payment methods
Paying extra money towards your student loans is a good way to pay off your debt faster. Federal law prohibits prepayment penalties for any kind of student loan, but remember that additional payments must go towards the loan's principal if you want to make serious progress.
If you pay your student loans online, you might have the option to choose how the money is applied. There may be an option to choose where your extra funds are allocated, such as to the interest only, the interest and principal, or just the principal. If you pay by check, include "Apply to principal" on the memo line for any extra payments.
If you have multiple loans, there are two common approaches to paying down debt: the snowball method and the avalanche method. The snowball method involves paying off the smallest loan first, then moving on to the next-biggest loan. This approach can give you a sense of making progress and motivate you to keep going. The avalanche method tackles the loan with the highest interest rate first. Putting extra payments on the most expensive loan will save you the most money.
To make sure that your payments are applied correctly, devise a clear strategy and communicate specific instructions to your lender for all your payments going forward. You can also keep an eye on your online accounts to ensure that your extra payments are applied correctly.
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Frequently asked questions
Lenders will typically apply extra payments toward outstanding fees and interest before your principal. You can check your options via the servicer’s online portal. You may find an option for “other amount” or “define your excess payment preference” — from here, you can specify how you want your extra funds divided. You can also instruct your servicer — either online, by phone or by mail — to apply overpayments to your principal balance and to keep next month’s due date as planned.
Signing up for autopay is a way to lower your student loan interest rate so that more of your money goes toward your principal balance. Federal student loan servicers offer a quarter-point interest rate discount if you let them automatically deduct payments from your bank account. You can also pay half your bill every two weeks, which is called a “biweekly” payment. You’ll end up making an extra payment each year, shaving time off your repayment schedule and dollars off your interest costs.
If you have multiple loans, you can request that your student loan servicer apply your extra payments to a specific loan (such as the loan with the highest interest rate) to ensure you save money and meet your debt repayment goals. There are two common approaches: the snowball method, which involves paying off the smallest loan first, and the avalanche method, which involves tackling the loan with the highest interest rate first.
