Lori Meadows
Paying off student loans can be a daunting task, but there are several strategies to help you get ahead. Making extra payments on your student loans can help you save on interest and pay off your debt faster. However, it's important to understand how extra payments are applied to your loan. Typically, extra payments are first applied to any outstanding fees and interest, and then to the principal. To make the most of your extra payments, you can instruct your loan servicer to apply the extra funds directly to the principal balance. Additionally, if you have multiple loans with different interest rates, focus on paying off the higher-interest loans first. Creating a budget and exploring debt reduction strategies can also help you manage your student loan payments effectively.
| Characteristics | Values |
|---|---|
| How to pay extra | Online, by phone, by mail, or through the servicer’s online portal |
| How to instruct the servicer | Include “Apply to principal ” on the memo line for any extra payments |
| How to check if the payment was applied to the principal | Check your online account or statements regularly |
| How to avoid prepayment | Contact the servicer to apply overpayments to your principal balance and to keep next month’s due date as planned |
| How to avoid late fees | Make regular payments before or on the due date |
| How to save on interest | Make extra payments, refinance to potentially lower your interest rate, or pay interest while in school |
| How to pay off student loans faster | Pay more than the minimum each month, pay the highest-interest loans first, or use autopay |
| How to make a monthly budget | Use an online budgeting tool, an Excel spreadsheet, or write down your income and expenses in a notebook |
| How to reduce debt | Make a budget, explore strategies for reducing debt, and compare federal repayment plans |
| How to avoid delinquency | Request a different due date, take advantage of the ED's temporary "on-ramp" period, or pay at least the interest while in school |
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What You'll Learn
Paying extra on student loans saves interest
Paying the minimum amount due on your student loans each month is a sure way to pay them off eventually. However, making extra payments can help you get out of debt faster and save you money on interest.
Student loan interest accrues daily, in most cases, starting the day your loans are disbursed. Interest accrues while you're in school, during your grace period, and during periods of student loan deferment and forbearance. This interest capitalizes when repayment begins, meaning it is added to your principal loan amount. As a result, you'll wind up paying interest on a larger amount, increasing the total amount you pay over time.
To avoid paying interest on interest, consider making monthly interest-only student loan payments while you're in school, during your grace period, or during a forbearance. You can also make a lump-sum interest payment before your grace period ends.
If you can afford to make extra payments toward the principal, you'll speed up your debt-free date. When making extra payments, be sure to instruct your servicer to apply the overpayments to your principal balance and to keep the next month's due date as planned. This is because student loan servicers may use your extra payment to advance your due date, applying the extra amount to next month's payment.
To get the full benefit of extra payments, tell your servicer to apply the extra payments to your highest-interest-rate loans first. You can also use a student loan payoff calculator to see how fast you could get rid of your loans with extra payments and how much money in interest you'd save.
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How to make extra payments
Making extra payments on your student loans can help you save on interest and pay off your debt faster. Here are some tips on how to make extra payments:
First, understand how extra payments are applied. Typically, extra payments are applied to outstanding fees, interest, and then the principal. You can instruct your loan servicer to apply extra payments to the principal balance to reduce it faster. This is especially important if you have multiple loans with different interest rates, in which case you should focus on paying off the higher-interest loans first.
Next, create a budget to determine how much extra money you can allocate towards your student loans each month. You can use an online budgeting tool, a spreadsheet, or simply write down your income and expenses. See if your loans fit into your budget and payment schedule, and consider using repayment strategies such as the avalanche method (focusing on paying off the highest-interest loans first) and the snowball method (paying off the highest-interest loan first, then applying that payment amount to lower-interest loans).
You can also increase your income to make extra payments. This could include starting a side hustle, selling items, or renting out your assets. Additionally, if you get a raise or bonus, consider allocating a portion of it towards your student loans. You can also explore refinancing options to potentially lower your interest rate and shorten the repayment term.
Finally, set up direct debit or autopay to receive a discount on your interest rate, and remember that there is no penalty for paying off student loans early or paying more than the minimum. By combining these strategies, you can make extra payments and accelerate your progress towards becoming debt-free.
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Strategies to pay off loans faster
First, it is important to understand the ins and outs of your loans. Make a list of your student loans, including whether they are private or federal, the monthly payment and due date, the current and principal balances, the interest rates, and the servicer. Check your free credit report to gather this information.
Next, set up a direct debit or autopay system to make regular payments. This will lower your interest rate by 0.25%, and ensure you make payments on time. Making extra payments, along with your regular monthly payments, may reduce the total amount you pay for your loan and help pay it off faster.
If you have multiple loans, focus on paying off the higher-interest loans first. Instruct your servicer to apply overpayments to your principal balance and to keep the next month's due date as planned.
You can also look to your employer to see if they offer a student loan repayment program as an employee benefit. Increasing your income through a side hustle can also help you pay off your loans faster.
Finally, consider refinancing your student loans to save on interest. However, note that once you refinance, your student loans permanently become private and cannot be turned back into federal loans.
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Understanding student loan interest
There are two types of interest to understand: simple interest and compound interest. Simple interest is calculated using the principal amount borrowed. In contrast, compound interest is calculated based on the original loan amount and the interest that has accrued over time. Student loans are typically simple interest loans, meaning that interest accrues on the principal balance daily.
The amount of interest paid depends on the loan amount, the repayment period, and the interest rate. Higher interest rates will result in higher total payments if the loan is not paid off quickly. For example, a $5,000 loan at 6% interest with a 10-year repayment period will result in monthly payments of $56, and a total of $1,649 in interest. However, with an additional monthly payment of $50, the total interest paid decreases to $716, saving $923 and reducing the repayment time by five years.
When making extra payments, it is important to understand how the payment will be allocated. Payments are typically applied to fees, then interest, and finally the principal loan amount. It is possible to instruct the loan servicer to apply extra payments to the principal balance to reduce the total loan amount and speed up repayment. Additionally, if multiple loans with different interest rates are held, it is advisable to pay off the higher-interest loans first.
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Student loan repayment plans
Paying extra on student loans can help you save on interest and pay off your debt faster. Here are some tips for allocating extra payments towards your student loans:
Check your loan type and understand how extra payments are applied
Before making extra payments, it's important to understand how your payments will be applied. Typically, lenders will first apply your payments towards any outstanding fees and interest, and then towards the principal (the original amount borrowed). If you have a subsidized federal loan, the government will pay your interest under certain conditions, such as if you're enrolled in school at least half-time or during your post-school grace period. In this case, your extra payments will go directly towards the principal.
Instruct your lender to apply extra payments to the principal
To make the most progress in reducing your debt, instruct your lender to apply your extra payments directly to the principal. You can do this by specifying “Apply to principal” on the memo line of your check or by contacting your lender directly. While they may be required to pay interest first, ensuring that your extra payments are applied to the principal will help you pay off your loan faster.
Compare repayment plans and consider refinancing
Use tools like the Education Department's Loan Simulator to compare different federal repayment plans based on monthly payment amounts, total interest, and other factors. Consider refinancing your loans to potentially lower your interest rate and shorten the repayment term. Just be sure to weigh the benefits against any potential costs or penalties associated with refinancing.
Make a budget and explore debt reduction strategies
Create a monthly budget to understand your income and expenses, and explore strategies for reducing your overall debt. This will help you determine how much extra money you can allocate towards your student loans. Consider using repayment strategies like the avalanche method (focusing on paying off the highest-interest loans first) and the snowball method (paying off the highest-rate loan first, then applying that payment amount to lower-rate loans).
Take advantage of autopay discounts
Signing up for direct debit or autopay can reduce your interest rate by 0.25%. This small discount can add up over time and help you save on interest. Just be sure to keep track of your payments and ensure they are applied correctly.
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Frequently asked questions
If you are paying your student loans by check, include “Apply to principal” on the memo line for any extra payments. You can also call your lender directly and instruct them to apply overpayments to your principal balance.
Paying extra on your student loans can help you save on interest and get out of debt faster. The more you pay toward your loans, the less interest you’ll owe, and the quicker the balance will disappear.
No, there is no penalty for paying off student loans early or paying more than the minimum. However, student loan servicers may use your extra payment to advance your due date.
You can ask your employer if they offer a student loan repayment program as an employee benefit. You can also start a side hustle to increase your income, such as selling items, renting out your spare room, or freelancing.
