Savanna Hoffman
Paying off student loans can be a daunting task, but there are ways to reduce the burden. One strategy is to make extra payments towards the loan's principal, which can lead to significant savings over time. While lenders typically apply payments to outstanding fees and interest first, borrowers can request that any additional funds go directly towards the principal. This can be done by specifying instructions online or including Apply to Principal on a cheque. By increasing monthly payments, borrowers can reduce the total interest paid and shorten the loan's duration. Additionally, refinancing student loans with a private lender may be an option for those with strong credit scores, potentially resulting in lower interest rates. Effective strategies for managing student loan debt include exploring repayment plans, postponement options, and staying informed about loan terms and conditions.
| Characteristics | Values |
|---|---|
| How to pay the principal on student loans | Paying extra each month or making a lump sum payment towards the principal |
| How to ensure extra payments are applied to the principal | Specify how you want your extra funds to be divided via the servicer's online portal; include "Apply to principal" on the memo line if paying by check; call the lender directly if you can't specify online |
| Benefits of paying extra towards the principal | Save money on interest charges over time; pay off the loan faster |
| Drawbacks of paying extra towards the principal | The full extra amount might not be subtracted from the principal balance, as lenders typically apply extra payments towards outstanding fees and interest first |
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What You'll Learn
Paying extra to save on interest
If you want to pay off your student loan early and save on interest, putting extra money toward your loans is a good strategy. Federal law prohibits prepayment penalties for any kind of student loan, but remember that those additional payments must go toward the loan's principal to make a significant impact.
When you make a payment on your student loan, the money usually goes towards any late charges, collection costs, or outstanding interest first. Only after that does it get applied to the outstanding principal. This is why your balance may not decrease by the full amount of your payment each month, and sometimes it may even rise despite making payments. Interest and fees can add up quickly, so finding the right payment plan and staying on top of payments can help stop your loan balance from increasing due to interest and fees.
If you pay an extra $250 on your loans, the full $250 might not be subtracted from the principal balance because the lender may be required to pay interest first. Once the lender makes any required interest payments, they will then allocate the remaining money according to your instructions. You can check your online account or statements regularly to see if your lender has applied your extra money to the principal of the loan.
If you can afford it, paying a little extra each month or making a lump sum payment towards your principal is a great way to lower the total cost of your loan. Not only do you pay down your debt faster, but you also save money on interest charges over time. For example, let's say you have $35,000 in student debt with a 6.80% interest rate and a $403 minimum monthly payment. By paying the minimum, you'd pay off the loan in 10 years with a total of $13,324 paid in interest. However, if you increased your monthly payment to $500 a month (an extra $97), you'd save $3,613 in interest over the life of the loan.
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Making a lump-sum payment
If you are in a position to make a lump-sum payment, it is important to ensure that the money goes towards the principal of your loan, rather than future interest or fees. When making a payment online, some loan servicers' websites will allow you to specify how you want your extra funds to be allocated. For example, you may have the option to choose that the money goes towards the interest only, the interest and principal, or just the principal. If you are unable to specify how the money should be allocated online, try calling your lender directly.
If you pay your student loans via a check in the mail, include "Apply to principal" on the memo line for any extra payments. You can also request that your loan servicer applies the lump sum to your loan's balance. If you have multiple loans, you may want to provide additional instructions based on which loan you want to pay off first. This can usually be done online or by mail, but check with your loan servicer for specific instructions.
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Customising payments
When making payments on your student loans, you can choose to pay more than the minimum amount. This extra money can be used to reduce the principal of your loan, lowering the total cost of your loan and helping you pay off your debt faster.
To ensure that your extra payments are applied to the principal, you can take the following steps:
- Contact your lender: Communicate your preferences to your lender and provide specific instructions for all your payments. You can do this by calling your lender or specifying your preferences online.
- Check your online account: Regularly monitor your online account to ensure that your lender has applied your extra payments to the principal as instructed.
- Take advantage of customisation options: When making payments online, look for options such as "other amount" or "define your excess payment preference". These options allow you to specify how your extra funds should be allocated.
- Avoid automatic advancements: When making excess payments, look for an option like "Do not advance the due date". This ensures that your lender treats your payment as an extra payment rather than applying it to the next month's bill.
- Include instructions with your payment: If you pay by cheque, include "Apply to principal" on the memo line to indicate that any extra payments should be applied to the principal.
It's important to note that lenders typically apply payments towards outstanding fees and interest before the principal. Therefore, staying current with your payments and finding the right repayment plan can help prevent your loan balance from increasing due to interest and fees. Additionally, paying off interest is still beneficial as it reduces the principal balance that accrues interest.
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Using a prepayment calculator
If you want to pay off your student loan early, putting extra money toward your loan is a good way to go. Federal law prohibits prepayment penalties for any kind of student loan. However, remember that those additional payments must go toward the loan's principal if you want to make a significant difference.
A prepayment calculator can help you understand how much extra you should pay each month to save a substantial amount of interest in the long run. For example, let's say you have $35,000 in student debt with a 6.80% interest rate and a $403 minimum monthly payment. By paying the minimum, you’d pay off the loan in 10 years with a total of $13,324 paid in interest. However, if you increased your monthly payment to $500 a month (an extra $97), you’d save $3,613 in interest over the life of the loan.
Another example is if you have a remaining loan term of 9 years and 10 months and you pay an extra $150.00 per month, you will pay off the loan in 6 years and 2 months, saving you $4,421.28 in interest payments.
You can also use a prepayment calculator to estimate your loan balance and repayment obligation after graduation. This is especially useful for those still in college or who haven't started yet. It may be helpful to first use a College Cost Calculator to get an idea of how much college will cost.
Keep in mind that lenders will typically apply extra payments toward outstanding fees and interest before the principal. So, ensure that your payments make a dent in your balance by asking your lender to make principal-only payments on your student loans. You may be able to do this through the servicer's online portal, where you can specify how you want your extra funds divided.
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Refinancing
When refinancing, it is important to compare offers from multiple lenders to find the best terms. Devising a clear strategy for paying off your student loans and communicating specific instructions to your lender for each payment can help ensure that your extra payments are applied correctly.
It is worth noting that simply making extra payments on your loan will not necessarily lower the principal balance. You need to ensure that the extra payments are specifically allocated to the principal. By paying more towards the principal, you can reduce the amount of interest you pay over the life of the loan and get out of debt faster.
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Frequently asked questions
Paying extra on your student loan can help you save money on interest charges and pay down your debt faster. You can specify how you want your extra funds to be divided. For instance, if you pay via check, include "Apply to Principal" on the memo line for any extra payments.
Lenders will typically apply extra payments toward outstanding fees and interest before the principal. For federal student loans, your payment is generally first applied to any late charges, collection costs, or outstanding interest, and only after that to the outstanding principal.
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 ensure that future payments are accurately applied as per your instructions.
You can use a student loan prepayment calculator to see how even a small extra amount each month can save you interest in the long run. For example, if you have a $35,000 student debt with a 6.80% interest rate and a $403 minimum monthly payment, increasing your monthly payment to $500 can save you $3,613 in interest over the life of the loan.
Federal law prohibits prepayment penalties for any kind of student loan. However, your lender may be required to pay interest first, so if you pay extra, the full amount might not be subtracted from the principal balance initially.
