Lori Meadows
Paying off student loans can be a daunting task, but there are strategies to make it more manageable. One approach is to focus on reducing the principal, which is the amount you borrowed, excluding interest and fees. By making extra payments towards the principal, you can save money on interest over time. However, lenders typically apply extra payments towards outstanding fees and interest first, so it's important to understand your lender's policies and communicate your preferences clearly. This guide will explore how to navigate lender policies and make effective principal-only payments to accelerate your student loan repayment journey.
| Characteristics | Values |
|---|---|
| Prepayment penalties | Federal law prohibits prepayment penalties for student loans |
| Interest | Interest must be paid first before the principal balance |
| Custom payments | Possible to make custom payments to pay off loans with the highest interest rate |
| Online options | Specify how you want your extra funds divided via the servicer's online portal |
| Check payments | Include "Apply to principal" on the memo line for any extra payments |
| Lender contact | Call your lender directly to specify how extra funds should be allocated |
| Online account | Regularly check your online account to see if your lender has applied your extra money to the principal |
| Minimum payment | Increase your monthly auto-pay above the minimum payment amount to have more of your payment go towards the principal |
| Equity | Making principal-only payments can help build equity |
| Interest calculation | Most student loans calculate interest using the simple daily interest calculation, which is based on the outstanding principal balance |
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What You'll Learn
- Lenders will apply extra payments to outstanding fees and interest before the principal balance
- Request that your lender makes principal-only payments on your student loans
- Include Apply to Principal on the memo line for any extra cheque payments
- Make extra payments on the same day as your due date to reduce the principal balance
- Student loan refinancing may qualify you for a lower interest rate
Lenders will apply extra payments to outstanding fees and interest before the principal balance
When making extra payments on your student loan, it is important to understand how lenders apply these payments. Typically, lenders will first allocate your extra payment towards any outstanding fees and interest before applying the remainder to the principal balance. This is because interest is calculated against the principal balance, so paying down the principal faster reduces the interest you will pay over the life of the loan.
For example, let's say you have a student loan with a principal balance of $35,000 and an interest rate of 6.80%. If you make only the minimum monthly payments, it will take you 10 years to pay off the loan, and you will have paid a total of $13,324 in interest. However, if you increase your monthly payment by just $97, paying $100 extra towards the principal each month, you can cut your loan term by more than 4.5 years and save over $3,600 in interest.
To ensure that your extra payments are applied to the principal balance, there are a few things you can do. First, check your lender's online portal for options to specify how you want your extra funds to be allocated. You may find an option to designate your extra payment as an "additional payment" or "extra amount" to ensure it is not applied towards the next month's bill. If you pay by cheque, you can include a memo with instructions to apply the extra payment to the principal. If you are unable to specify how the extra funds should be allocated online, try calling your lender directly to communicate your instructions.
It is important to monitor your online accounts and statements regularly to ensure that your lender has applied your extra payments correctly. If they have not, reach out to them to ensure that future payments are applied according to your instructions. By taking these steps, you can make sure that your extra payments have the maximum impact in reducing your student loan debt.
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Request that your lender makes principal-only payments on your student loans
If you want to pay off your student loan debt as soon as possible, putting extra money toward your loans is a good way to go. Federal law prohibits prepayment penalties for any kind of student loan, but remember, those additional payments must go toward the loan's principal if you want to make serious progress.
Lenders will typically apply extra payments toward outstanding fees and interest before your principal. Ensure that your payments make a dent in your balance by asking your lender to make principal-only payments on your student loans. You can check your options via the servicer's online portal. You may find an option for "other amount" or "define your excess payment preference" — from here, you can specify how you want your extra funds to be divided.
If you pay your student loans by cheque, include "Apply to principal" on the memo line for any extra payments. You should also try calling your lender directly if you can't specify online how extra funds should be allocated for a given loan. However, your lender may be required to pay interest first. So if you pay extra on your loans, the full amount might not be subtracted from the principal balance. But once the lender makes any required interest payments, they would then allocate the remaining money according to your instructions.
Check your online account or statements regularly to see if your lender has applied your extra money to the principal of the loan. In addition, make sure it was paid to the loan you specified. If your lender didn’t apply your extra payment to the principal balance, reach out to ensure that future payments are accurately applied.
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Include Apply to Principal on the memo line for any extra cheque payments
If you're paying off your student loan debt and want to make extra payments, it's a good idea to put any extra money toward your loans. This can save you a significant chunk of money in the long run. Federal law prohibits prepayment penalties for any kind of student loan, but remember that any additional payments must go toward the loan's principal if you want to make serious progress.
When paying your student loans via cheque, include "Apply to Principal" on the memo line for any extra payments. This is because lenders will typically apply extra payments toward outstanding fees and interest before the principal. By including this instruction, you are specifying that any excess funds should be used to reduce the principal.
It is important to note that your lender may be required to pay interest first. So, if you pay extra on your loans, the full amount might not be subtracted from the principal balance. However, once the lender makes any required interest payments, they will then allocate the remaining money according to your instructions.
To ensure that your extra payments are applied correctly, keep an eye on your online accounts and statements. If your lender hasn't applied your extra payment to the principal balance, reach out to them to ensure that future payments are accurately applied.
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Make extra payments on the same day as your due date to reduce the principal balance
Making extra payments on the same day as your due date is a great way to reduce the principal balance of your student loan. This strategy can save you a significant amount of money in interest over the life of the loan. Here are some detailed steps to help you make the most of this strategy:
First, check with your lender to understand their process for allocating extra payments. Lenders typically apply extra funds towards outstanding fees and interest before the principal. However, you can request that your extra payments be treated as principal-only contributions. This can often be done through the servicer's online portal, where you may find an option to "define your excess payment preference".
If you are unable to specify how you want your extra funds allocated online, contact your lender directly. You may be able to include instructions with your payment, such as writing "Apply to principal" on the memo line of a check. Even if you provide instructions, your lender may still be required to pay interest first. Therefore, it is important to regularly check your online account to ensure that your extra payments have been applied to the principal as requested.
Additionally, consider selecting the "Do not advance due date" option when making your extra payment. This option ensures that your lender applies the extra funds to the principal balance, reducing the total interest accrued over the life of the loan. Without this specification, your lender may apply the extra payment towards future payments, which does not reduce the principal as quickly.
Finally, create a clear strategy for paying off your student loans and communicate this to your lender. By taking a proactive approach and staying organized, you can ensure that your extra payments are applied correctly and help you achieve your financial goals.
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Student loan refinancing may qualify you for a lower interest rate
Student loan refinancing is when you take out a new private loan that pays off your existing loans. By refinancing your student loans, you may qualify for a lower interest rate, which can help you save money. A lower interest rate can also help you pay off your debt faster and reduce your monthly loan payments.
When you refinance your student loans, a private lender pays off your existing loans and replaces them with a new loan that has a new interest rate and repayment schedule. Going forward, you will make monthly payments to the new lender. Your initial rate will be determined after a review of your application and credit profile and may be based on your credit score, level of degree earned, and the availability and credit score of a cosigner applicant.
If you have federal student loans, keep in mind that refinancing to a private loan means losing access to protections available only to federal student loan borrowers, such as income-driven repayment plans and loan forgiveness. Therefore, if you decide to refinance federal loans, you should have stable personal finances and emergency savings. However, if you have private student loans, good credit, and stable income, refinancing could be a good option if you can secure a lower interest rate.
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Frequently asked questions
You can pay more than the minimum amount on your student loan by increasing your monthly auto-pay amount or making an extra payment on the same day as your due date.
You can specify how you want your extra funds to be divided by checking your options via the servicer's online portal. If you pay by cheque, include "Apply to principal" on the memo line.
Paying extra towards the principal saves you money by reducing the amount of interest that accrues over the life of the loan.
No, federal law prohibits prepayment penalties for any kind of student loan.
You may still be able to pay down your loan faster by refinancing your loan or using other payment options.
