Savanna Hoffman
Paying off the principal of a student loan can be a great way to save money on interest in the long run. When you take out a student loan, you are required to repay the principal balance (the amount borrowed), the interest, and sometimes fees. While lenders typically apply extra payments towards interest and fees before the principal, there are ways to ensure your extra payments go towards the principal. This includes increasing your monthly auto-pay above the minimum payment and making an extra payment on the same day as your due date. Additionally, federal law prohibits prepayment penalties for student loans, so paying extra on your loan can help you pay it off faster.
| Characteristics | Values |
|---|---|
| How to pay on the principal of a student loan | Make extra payments on your loan |
| Ensure that your extra payments go toward the principal and not the interest on the loan | |
| Sign up for autopay | |
| Increase your monthly autopay above the minimum payment amount | |
| Benefits of paying on the principal of a student loan | Save a significant chunk of money |
| Speed up payback time | |
| Lower overall borrowing costs |
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What You'll Learn
Ensure extra payments go towards the principal
Making extra payments on your student loan can help you pay off your debt faster. However, you need to ensure that these extra payments are applied to the principal and not the interest or fees. Here are some ways to ensure that your extra payments go towards the principal:
- Check your loan servicer's website for options: Many lenders and servicers have online portals where you can specify how you want your extra funds to be allocated. Look for options such as “other amount” or “define your excess payment preference” to indicate that you want your extra payments to go towards the principal.
- Set up standing instructions: You can set up standing instructions online with your loan servicer to send any extra money towards the principal. This can be done through autopay, where you increase your monthly autopay amount to reduce the principal balance.
- Make payments on the same day as your regular payment: By making an extra payment on the same day as your regular monthly payment, you ensure that the standard payment covers the interest and fees, allowing the additional payment to go directly towards the principal.
- Contact your loan servicer: If you cannot find the option to allocate extra payments towards the principal on your servicer's website, contact them directly. They should be able to provide instructions or apply your extra payment towards the principal.
- Review your statements: After making an extra payment, log in to your account and review your monthly statements to ensure that the payment was applied correctly towards the principal. If not, contact your loan servicer to resolve the issue.
- Focus on the loan with the highest interest rate: If you have multiple student loans, consider applying extra payments to the loan with the highest interest rate. This will help you save the most on interest and pay off your debt faster.
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Understand how interest and principal are balanced
When you take out a student loan, you are required to repay the principal balance (the amount you borrowed), the interest (the cost of borrowing the principal), and, in some cases, the fees (which are often paid upfront). Understanding how interest and principal are balanced is crucial for effectively managing your student loan debt.
Firstly, it's important to know that interest accrues daily on your student loan. The interest rate is calculated as a percentage of your loan amount or principal. Consequently, a lower principal balance leads to lower interest charges each month. As a result, the goal is to reduce the principal as quickly as possible.
Initially, a large portion of your monthly payments will go towards interest, with only a small fraction contributing to the principal. However, over time, this balance shifts. As you continue to make payments, a larger proportion of your monthly instalments will be allocated to the principal, while the amount directed towards interest decreases.
To expedite the repayment process and lower your overall borrowing costs, you can make principal-only payments on your student loans. These payments can be made monthly or occasionally. It's important to note that simply making extra payments won't necessarily reduce the principal balance. To ensure that your additional payments are applied to the principal and not the interest, you may need to take specific steps, such as explicitly instructing your lender.
Additionally, federal law prohibits prepayment penalties for any kind of student loan. This means that you won't be charged extra for making early or additional payments. By paying more than the minimum amount due each month, you can accelerate the reduction of your principal balance. However, it's crucial to maintain timely payments and fulfil the minimum monthly requirements for all your loans to avoid delinquency and potential damage to your credit rating.
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Make principal-only payments monthly or occasionally
Making principal-only payments on student loans can be done monthly or occasionally and can help speed up the payback time and lower your overall borrowing costs. However, just making extra payments on your loan won't necessarily lower your loan's principal balance. You need to ensure that your extra payments are actually going towards the principal and not the interest on the loan. This is because lenders will typically apply extra payments towards outstanding fees and interest before the principal.
There are a few ways to ensure that your extra payments are going towards the principal. Firstly, check your online account or statements regularly to see if your lender has applied your extra money to the principal of the loan. If they haven't, reach out to them to ensure that future payments are accurately applied. You can also set up standing instructions online, telling your servicer to send any extra money towards the principal. Additionally, online payment platforms often allow borrowers to specify that extra amounts are principal-only payments.
It's important to keep in mind that you need to be in a financially comfortable spot to make principal-only payments. This means ensuring that you can afford to pay more than the required amount each month and that you are keeping up with the minimum monthly requirements for all your loans. Signing up for autopay can help you stay on track.
Making principal-only payments on your student loans can help you pay off your loans sooner and save you a significant chunk of money in interest. However, it's important to be aware that not everyone is in a position to pay more than the required amount each month, and that's fine too. You might simply choose to use an occasional windfall, such as a bonus at work or a cash gift, to make a principal-only payment.
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Increase monthly autopay above the minimum
Auto Pay is a convenient way to make your student loan payments automatically each month. It is a useful method to ensure timely payments without having to mail in a check or log in to your online account each time. While your account is enrolled in Auto Pay, you will receive an interest rate reduction of 0.25%. By default, Auto Pay will be set to pay the minimum payment on each of your loans. However, if you wish to pay more than the minimum, you can increase the autopay amount. Here are some benefits and considerations of increasing your monthly autopay above the minimum:
Benefits of Increasing Monthly Autopay:
- Faster Debt Repayment: Paying more than the minimum can help you pay off your loans faster. This is because you are reducing the principal balance with each payment, which, in turn, lowers the overall interest paid over the life of the loan.
- Quick Wins and Motivation: The "debt snowball" method suggests that paying off smaller balances first can be motivating. By seeing some loans drop off your list of debt, you may feel encouraged to tackle the rest.
- Interest Savings: Increasing your monthly payment can result in significant interest savings. For example, an extra payment of $97 per month can save you $3,613 in interest over the life of the loan.
- Convenience: With Auto Pay, you won't have to worry about missing payments or ending up in delinquency. The payments will be made automatically, ensuring timely payments each month.
Considerations:
- Refinancing Federal Loans: If you are considering refinancing your federal student loans to get a better interest rate, keep in mind that you may lose certain borrower protections, such as income-driven repayment and student loan forgiveness.
- Income-Driven Repayment Plans: If your loan is on an Income-Driven Repayment (IDR) plan, you cannot set up Auto Pay for amounts above the minimum. However, you can still make manual payments at any time to pay more than the minimum.
- Overdraft Fees: Ensure that you have enough funds in your bank account to cover the automatic payments. Overdraft or insufficient funds fees can be a concern if you don't manage your account diligently.
- Difficulty in Cancelling: Auto Pay might be challenging to cancel if you encounter difficulties keeping up with the payments. It is important to monitor your financial situation and make adjustments as needed.
In summary, increasing your monthly autopay above the minimum can be a strategic decision to accelerate debt repayment and save on interest costs. However, it is essential to carefully consider your financial situation, loan terms, and potential challenges before opting for this approach.
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Use a student loan prepayment calculator
A student loan prepayment calculator is a useful tool to help you understand how much money you can save when you prepay your student loans. It also breaks down how much you can save each month and in total.
Firstly, you will need to enter your student loan balance and the average interest rate. If you have multiple student loans, you can enter the total balance and the weighted average interest rate.
Next, the calculator will automatically calculate your current monthly payment.
Then, you will need to decide on the prepayment amount. You can either choose to make a higher monthly payment, for example, $100 per month, or you can enter any amount of money you would like to add to your monthly payment. Alternatively, you can choose the number of years in which you want to pay off your student loans. For example, if you are on a 10-year standard repayment plan, you can choose to pay off your student loan in 7 years.
Finally, the calculator will show you your total monthly payment, your total lifetime savings, and how many years early you will pay off your student loans.
Using a student loan prepayment calculator can help you understand the impact of making extra payments towards the principal of your student loan. By making extra payments, you can save a significant amount of money in interest over the long term and pay off your loan sooner.
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Frequently asked questions
When making payments online, you may be able to specify that the money is to be applied to the principal. Look for an option such as “other amount” or “define your excess payment preference”. If you pay by cheque, include "Apply to principal" on the memo line. You can also call your lender directly and ask them to make principal-only payments on your student loans.
Making principal-only payments can help you pay off your student loans faster and reduce your overall borrowing costs. This is because interest accrues daily, so the less principal you have left to pay, the lower your interest costs.
You can use strategies such as the debt snowball or debt avalanche methods. The debt snowball method involves paying off your smallest loan balances first, which can help you stay motivated by seeing loans drop from your list of debt. The debt avalanche method involves focusing on the loan with the highest interest rate first, which saves more in interest over the life of the loan.
