Lana Oconnell
Paying more than the minimum monthly repayment on your student loan is possible and can help reduce your loan balance faster. This is generally referred to as prepayment and can save you money on interest. However, it is important to check with your loan servicer how additional payments are applied, as sometimes lenders will “credit” the amount against a future payment rather than reducing your loan balance. It is also important to note that penalties for late payments are temporarily removed to help borrowers adjust to the repayment schedule.
| Characteristics | Values |
|---|---|
| Making more than the minimum payment | Helps reduce debt faster and saves money on interest |
| Making only the minimum payment | Can keep you in debt for longer, especially if your federal loans are on an IDR plan |
| Partial payment | The unpaid amount is considered late and you could be charged late fees |
| Late payment | Penalties for late payment are temporarily removed to help borrowers get acclimated to repayments |
| Late payment (private student loan) | Can be reported to credit bureaus within 30 days and may go into default as soon as 90 days |
| Late payment (federal student loan) | Any unpaid balance is considered delinquent right away, but it's not reported to credit bureaus until 90 days late |
| Default (federal student loan) | Occurs when the balance is 270 or more days past due |
| Consequences of default (federal student loan) | No longer qualify for additional financial aid, lose eligibility for forbearance, deferment and IDR plans, government can garnish wages or take money from tax returns and Social Security benefits |
| Prepayment | Lenders typically call this "prepayment", you are entitled to make a payment to your account at any time without penalty, but check with your loan servicer first to see how additional payments are applied |
| Paid ahead status | Lender may "credit" the amount against a future payment rather than apply it toward your loan balance, most common with federal loans |
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What You'll Learn
Paying more reduces your loan balance faster
If you are in a position to pay more than your monthly student loan repayment, it can be a great way to reduce your loan balance faster. Making just the minimum payment can keep you in debt for longer, especially if your federal loans are on an IDR plan. If payments on IDR plans don't cover the interest, the unpaid interest can accrue and increase your balance.
Paying more than the minimum helps reduce debt faster while saving you money on interest. For example, if you had $50,000 in student loan debt with a 10-year term and a 6% rate, adding an extra $100 to your monthly payment could save you $3,479 and shave off nearly two years from the repayment term.
However, it's important to note that there may be better options for your money. If you have other types of debt, such as credit cards or private student loans, it usually makes more sense to apply extra payments to these first, as they may be less flexible in terms of repayment plans and forgiveness programs. Additionally, if you're on an income-driven repayment plan, you likely don't have much extra income to put towards your student loans. In this case, it may be better to focus on saving for retirement, creating an emergency fund, or exploring ways to lower your student loan payments.
It's also worth noting that lenders typically refer to paying more than the minimum as "prepayment". While you are generally entitled to make a payment to your account at any time without penalty, it's important to check with your loan servicer first to see how additional payments are applied. Sometimes, when you pay more than the monthly payment, your lender will credit" the amount against a future payment rather than apply it towards your loan balance, which is known as "paid ahead status". You can request that they instead put your payment towards your balance to reduce the overall balance, and it's a good idea to keep records of all transactions and communications.
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Lenders call it prepayment
Lenders refer to paying more than the monthly repayment as prepayment. There are no formal penalties for prepaying 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. However, there are a few additional steps to ensure that prepayments are applied to the principal balance of the loan with the highest interest rate. This is because the lender will treat it as though the borrower had paid their next instalment early and may delay the next payment due date. Therefore, it is important for the borrower to provide instructions to the lender to ensure that the prepayment is applied as the borrower wishes.
There are benefits to prepaying. Prepayment can save you money by paying off your loan earlier and by reducing the total interest paid over the lifetime of theloan. It also pays off the debt quicker, which may save the borrower thousands of dollars in interest that might have otherwise accrued.
There are two methods for prepaying loans: the avalanche method and the snowball method. The avalanche method involves paying off the loans with the highest interest rates first. The snowball method entails paying off the loan with the smallest loan balance first and will likely take longer and be more expensive in the long run.
Before prepaying student loans, borrowers should pay off any credit card debt and ensure they have around six months of savings for emergencies. It may also be advisable to consider putting extra money toward retirement if the earnings exceed the highest interest rate on the student loans.
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Avoid paid ahead status
Paying more than the minimum monthly payment on your student loan can be a good idea in some cases, but it can also lead to a "paid ahead" or "pay ahead" status, which has some unintended consequences. This status means that any extra payment is applied to your next payment rather than your loan balance, so it doesn't help you get out of debt faster. If you're pursuing Public Service Loan Forgiveness (PSLF), it can cause additional problems.
To avoid paid ahead status, you should only pay the exact amount of your monthly payment and not a penny more. If you do find yourself in a paid ahead status, you can try the following strategies:
- Contact your lender and request the removal of the paid ahead status. Ask them to make any payments count towards PSLF.
- Speak to a FedLoan Borrower Servicing Advocate if you're not getting the desired response from the phone representative. These individuals are better trained and can help resolve the situation.
- If the issue remains unresolved, contact PHEAA, the parent company of FedLoan. They have a direct contract with the Department of Education for loan servicing and may be able to assist you further.
- As a last resort, reach out to the Department of Education Student Loan Ombudsman to seek assistance in addressing the issue.
Additionally, when making overpayments, ensure that the money goes toward the principal of your loan balance. You can do this by making a specific principal payment directly on the servicer's website or through other specified methods. This way, you can avoid the negative consequences of paid ahead status while still benefiting from making larger payments.
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Save money on interest
Yes, you can pay more than your monthly minimum student loan repayment. This is known as "prepayment" and can help you reduce your loan balance faster. Making just the minimum payment can keep you in debt for longer, especially if your federal loans are on an IDR (Income-Driven Repayment) plan. If the payments on IDR plans are not enough to cover the interest, the unpaid interest can accrue and increase your balance.
Paying more than the minimum helps reduce debt faster while saving you money on interest. For example, if you had $50,000 in student loan debt with a 10-year term and a 6% rate, adding an extra $100 to your monthly payment could save you $3,479 and shorten the repayment term by almost two years.
However, it is important to note that some lenders may ""credit" the amount you overpay against a future payment, rather than applying it to your current loan balance. This is known as "paid ahead status" and is most common with federal loans. To avoid this, contact your loan servicer and request that they apply your overpayment to your current balance. Keeping records of all transactions and communications regarding your loan is also a good idea.
Additionally, it is worth mentioning that late payments on private student loans can have consequences. Private student loan lenders may report late payments to credit bureaus within 30 days, and the loan may go into default after 90 days. Defaulting on a federal loan will result in losing eligibility for additional financial aid, forbearance, deferment, and IDR plans. The government may also garnish your wages or take money from your tax returns and Social Security benefits to repay the debt.
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Avoid late fees
Student loans can be a stressful and daunting topic, but understanding the basics can help you make more informed financial decisions. Firstly, it's important to know that student loans have no prepayment penalties. This means that if you make an extra payment, it will not result in any additional fees. In fact, making an extra payment, known as a principal-only payment, can help reduce the interest you pay over the life of the loan and may even help you pay off the debt faster.
A principal-only payment is an extra payment made specifically to reduce the original amount borrowed, rather than covering interest or fees. By reducing the principal, you can decrease the total interest accrued over time. To ensure that your extra payment is applied directly to the principal, it's recommended to make the payment on the same day as your regular monthly payment. This way, your standard payment will cover the interest and any fees, allowing the additional payment to go directly towards reducing the principal.
It's also important to communicate with your lender to ensure that any additional payments are applied only to your loan's outstanding principal. When you make a payment, it is typically applied to fees, then interest, and finally the principal. However, you may have the option to choose how the money is allocated when paying online through the lender's website. This could include an option to select an "other amount" and specify how much you want to pay towards your loan that month and where the money should be allocated.
While making extra payments can be beneficial, it's not always feasible for everyone. You may choose to use occasional windfalls, such as a bonus at work or a cash gift, to make a principal-only payment when possible. Remember, the best way to protect your credit is to always make your payments on time and in full. By understanding how student loans work and exploring options like principal-only payments, you can make informed decisions and potentially save money in the long run.
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Frequently asked questions
Yes, you can pay more than the monthly minimum repayment. Paying more than the minimum can help you reduce your loan balance quicker and save you money on interest.
You can make a payment to your account at any time without penalty. Check with your loan servicer first to see how additional payments are applied. You can request that they put your payment toward your balance, reducing your overall balance.
If you are on an income-driven repayment plan, you may not have much extra income to put toward your loan. If you are aiming for Public Service Loan Forgiveness, you may want to avoid extra payments as every extra payment lowers the amount of forgiveness.
