Lori Meadows
Paying off student loans can be a daunting and lengthy process, but there are ways to reduce the burden. One method is to pay more than the minimum monthly payment by making principal-only payments. This means that any extra money goes directly towards the principal, reducing the interest accrued daily and helping to pay off the loan faster. However, this option is only feasible for those who can afford to pay more than the required amount each month. It is important to communicate with the lender to ensure that additional payments are applied only to the outstanding principal. Refinancing student loans with a private lender is another option to consider, as it may offer a lower interest rate, but it could also result in the loss of certain borrower protections.
| Characteristics | Values |
|---|---|
| Benefits | Paying more principal will help you save a significant amount of money in interest over the life of the loan and will help you pay off your student loans faster. |
| When to pay more principal | You should pay more principal when you can afford it and when you want to pay off your loans sooner. |
| How to pay more principal | You can pay more principal by making extra payments on your student loans, refinancing your student loans with a private lender for a lower interest rate, or using SoFi reward points. |
| Things to keep in mind | Lenders will typically apply extra payments toward outstanding fees and interest before your principal. Therefore, you should communicate with your lender to make sure that those additional payments are applied only to your loan's outstanding principal. |
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What You'll Learn
Making extra payments
If you pay by check, you'll need to contact your loan servicer and ask how to make occasional or regular principal-only payments. You may need to send a standing order in writing. If you pay online, you may be able to specify how you want your extra funds to be divided. Check your servicer's online portal for options such as "other amount" or "define your excess payment preference". If you have multiple loans, you can typically request that your student loan servicer applies your extra payments to a specific loan.
If you're making a separate, principal-only payment, try not to make the payment at the same time as your regular monthly payment. That way, the servicer is less likely to apply your second payment to next month's payment, which would prevent you from saving as much money as possible in interest. You can also look out for an option for "do not advance the due date", which will ensure that your lender treats your funds as an extra payment rather than applying them towards next month's bill.
If you can afford to make extra principal-only payments, it'll help you reduce the interest you pay over the life of your loan. However, not everyone is in a position to pay more than the required amount in any given month. If you've recently received a bonus at work or a raise, you can use that money to make an extra principal-only payment.
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Communicating with your lender
You can check your options via the servicer's online portal. There may be an option for "other amount" or "define your excess payment preference", where you can specify how you want your extra funds to be divided. If you have more than one student loan, you can typically request that your student loan servicer applies your extra payments to a specific loan. If you pay by check or don't see these options online, you'll need to contact your loan servicer and ask how to make occasional or regular principal-only payments. You may need to send a standing order in writing.
It's important to be as clear as possible with your lender about how you want your money handled. If you're making a separate, principal-only payment, try not to make the payment at the same time as your regular monthly payment. That way, the servicer is less likely to apply your second payment to next month's payment, which would prevent you from saving as much money as possible in interest. You may also have the option of setting up standing instructions online, telling your servicer to send any extra money towards the principal.
It's a good idea to keep checking your account at least every month, if not more frequently. Set up email alerts for any changes to your account, such as when a payment is made or a due date is coming up. Ask for a confirmation email or number so that you have a record of your request.
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Refinancing your loan
Refinancing your student loan is a good option to consider if you're looking to pay off your student debt early. With refinancing, you essentially exchange one or more of your old loans for a new one, ideally with a lower interest rate or better terms. This can be done through a private lender, such as a bank, credit union, or online lender.
Before refinancing, it's important to note that you'll need a solid credit score to qualify for a lower interest rate. If you don't have a good credit score, you can recruit a cosigner who does. Additionally, keep in mind that refinancing federal student loans can result in the loss of certain borrower protections, such as income-driven repayment plans and student loan forgiveness.
When refinancing, you can choose a longer or shorter repayment term. Opting for a longer term can lower your monthly payments, but it will increase the total amount of interest you pay over the life of the loan. On the other hand, choosing a shorter term will increase your monthly payments but reduce the total interest.
To get started with refinancing, you can check your eligibility and rates through online lenders such as SoFi and Earnest. These platforms offer a soft credit check that won't impact your credit score, and they provide flexible terms and competitive rates.
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Using windfalls
If you receive a windfall, such as a tax refund, work bonus, or cash gift, consider using that money to make a principal-only payment on your student loans. This can help you pay off your loans faster and reduce your overall borrowing costs.
- Contact your lender: Reach out to your lender directly and specify that you want any extra funds to be applied to the principal. You can do this by calling them or including a memo with your check, such as "Apply to principal."
- Online payment platforms: If you pay online through the lender's website, look for an option to choose how the money is applied. There may be an "other amount" or "define your excess payment preference" section where you can specify that the extra payment should go towards the principal.
- Avoid advancing the due date: Ensure that your lender treats your windfall payment as an extra payment rather than advancing the due date. Look for an option like "Do not advance the due date" when making the payment online.
- Make lump-sum payments: Instead of making regular monthly payments, consider making lump-sum payments towards the principal. This can be especially effective if you have a large windfall that can significantly reduce the principal balance.
- Restructure your loans: Consider refinancing or consolidating your loans to take advantage of lower interest rates or more favourable repayment terms. This can help you reduce your overall borrowing costs and speed up the repayment process.
Remember, paying extra towards the principal of your student loans can save you a significant amount of money in interest and help you become debt-free faster. However, it's important to balance this with your other financial goals and priorities.
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Devising a strategy
Firstly, assess your financial situation and ensure that you are in a position to make extra payments. This is an important first step, as you don't want to overextend yourself financially. If you can afford to make extra payments, consider using bonuses, raises, or windfalls to make a dent in your principal balance.
Next, communicate your intentions with your lender. Let them know that you plan to make extra payments and that you want these payments to be applied directly to the principal balance. This step is crucial, as lenders typically apply extra payments towards outstanding fees and interest. By explicitly instructing your lender, you can ensure that your extra payments have the maximum impact on reducing your principal.
Additionally, consider refinancing your student loans. Refinancing involves exchanging your old loans for a new one with a private lender, such as a bank or credit union. This can be beneficial if you have a good credit score, as it may qualify you for a lower interest rate. However, keep in mind that refinancing federal student loans can result in a loss of certain borrower protections, so be sure to weigh the pros and cons before making any decisions.
Another strategy is to set up standing instructions with your lender to send any extra money towards the principal. This can often be done online, but if not, you may need to send a standing order in writing. This ensures that any extra funds you have will automatically go towards reducing your principal balance.
Finally, stay organized and diligent by keeping a close eye on your online accounts. Set up email alerts for any changes to your account, such as payments made or upcoming due dates. This will help you identify any discrepancies and ensure that your extra payments are being applied correctly.
Remember, paying extra towards your student loan principal can help you save on interest and pay off your loan faster. However, always make sure you are financially comfortable before making any extra payments.
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Frequently asked questions
Paying more principal on student loans can save you a significant amount of money by reducing the interest you pay over the life of your loan. It also helps you pay off your student loans faster.
Lenders will typically apply extra payments toward outstanding fees and interest before your principal. To ensure that your payments are applied to the principal, communicate with your lender and request that your additional payments are applied only to the loan's outstanding principal. You may be able to set up standing instructions online or send a standing order in writing.
If you can afford to make extra payments, you can use bonuses or raises from work to pay more than the minimum amount due and put the extra money towards the principal balance. You can also refinance your student loans with a private lender to get a lower interest rate or choose a shorter repayment term.
Yes, you can consider using the extra money to pay down high-interest credit card debt or start a high-yield savings account. You can also use a student loan prepayment calculator to see how much you need to pay extra each month to save on interest.
