Janice Lozano
Making principal-only payments on student loans can be a great way to reduce the amount of interest paid and help individuals get out of debt faster. While lenders typically apply extra payments towards outstanding fees and interest, it is possible to request that these additional funds are allocated solely to the principal. This can be done by specifying payment preferences through the servicer's online portal or by contacting the lender directly. However, it's important to note that lenders may be required to pay interest first, so individuals should regularly check their accounts to ensure their instructions are being followed. Understanding the terms of the loan is crucial, as some loans may have specific requirements regarding interest payments.
| Characteristics | Values |
|---|---|
| How to make principal-only payments | Include "Apply to Principal" on the memo line for any extra payments sent by check. Call your lender directly if you can't specify online how extra funds should be allocated. |
| Lender behaviour | Lenders will typically apply extra payments toward outstanding fees and interest before the principal. |
| How to ensure payments are applied to the principal | Ask your lender to make principal-only payments. Check your lender's online portal for options to specify how you want your extra funds divided. |
| Government intervention | The government has paused all repayment on federally held student loans through the end of 2022, with no interest to be charged during that period. |
| Benefits of paying down the principal | It can reduce the amount of interest paid and help you get out of debt faster. |
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What You'll Learn
Paying extra on student loans
If you send in a payment amount that is more than your monthly payment, the lender will usually apply the extra money to future payments, unless you request otherwise. To ensure that your extra payment is applied to the principal of your loan, you can include "Apply to principal" in the memo line of your check or reach out to your lender directly to specify how you would like your extra funds to be allocated. It is important to keep records of all transactions and communications regarding your loans.
If you have multiple loans, you can choose to target one loan for extra payment. It is generally recommended to pay off the loan with the highest interest rate first. This will help you save the most money in interest. However, it is important to continue making minimum payments on your other loans to ensure they don't go into default.
Additionally, consider using a student loan prepayment calculator to see how even a small extra amount each month can reduce your interest burden over time.
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How to make principal-only payments
Making principal-only payments on your student loans can help you reduce the amount of interest you pay overall and get out of debt faster. Here are some steps you can take to make principal-only payments:
Understand Lender Priorities
Lenders typically apply extra payments towards outstanding fees and interest before the principal. This is because loan payments must legally go towards unpaid interest and fees before the principal. Therefore, it is important to specify that any extra payments should be applied to the principal.
Specify Payment Allocation
If you pay your student loans online, check your lender's online portal for options to specify how you want your extra funds to be allocated. You may find an option for "other amount" or "define your excess payment preference", where you can indicate that you want the extra funds to go towards the principal. If you cannot specify online, call your lender directly to provide instructions on how you want your extra funds to be allocated.
Include Instructions with Payments
If you pay your student loans by cheque, include "Apply to Principal" on the memo line for any extra payments. This instructs the lender to apply the extra funds towards the principal. However, the lender may still be required to pay interest first, so ensure that you regularly check your online account or statements to verify that your extra payments have been applied to the principal as instructed.
Use a Prepayment Calculator
Consider using a student loan prepayment calculator to understand how much you can afford to pay extra each month and how much interest you can save in the long run. This can help you plan your payments more effectively and ensure that your extra funds make a significant impact on reducing the principal.
Refinance Your Student Loans
If you have a solid credit score or can recruit a cosigner, consider refinancing your student loans. This involves taking out a new loan with a private lender, such as a bank or credit union, to pay off your existing student loans. Refinancing can help you secure a lower interest rate, reducing the overall cost of your student loans and making it easier to pay down the principal.
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Lenders allocating extra payments
Making extra payments on your student loans can help you save on interest and get out of debt faster. However, lenders will typically apply extra payments toward outstanding fees and interest before the principal. Therefore, it is important to ensure that your payments are applied correctly. Here are some steps you can take to ensure that your extra payments are allocated according to your preferences:
- Communicate with your lender: Devise a clear strategy for paying off your student loans and communicate specific instructions to your lender for all your payments. You can do this by calling your lender directly or specifying online via the servicer's online portal.
- Specify payment allocation: When making extra payments, specify that you want the funds to be applied to the principal balance. If paying by check, include "Apply to principal" on the memo line. If paying online, look for an option to define your excess payment preference and specify that you want your extra funds to be applied to the principal.
- Monitor your account: Check your online account or statements regularly to ensure that your lender has applied your extra payments according to your instructions. If they have not, reach out to your lender to ensure that future payments are accurately applied.
- Avoid "paid ahead status": Sometimes, lenders may credit your extra payment against a future payment rather than applying it to your current loan balance. This is called "paid ahead status" and is common with federal loans. To avoid this, request that your servicer apply your extra payments to your current balance to reduce your overall debt.
- Keep records: Maintain records of all transactions and communications regarding your loans. This will help you track your payments and ensure that your instructions are being followed.
By following these steps, you can ensure that your extra payments are allocated effectively toward paying down the principal of your student loans, helping you save on interest and accelerate your path to becoming debt-free.
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Interest accrual and payments
Borrowers can take steps to manage their interest accrual and minimize the total cost of their loan. One strategy is to make interest payments during periods when they are not required, such as during deferment or forbearance. By paying off accrued interest before it capitalizes, borrowers can keep their total loan cost down. Additionally, borrowers can choose to make principal-only payments on their student loans, which can reduce the amount of paid interest and help them get out of debt faster.
To ensure that extra contributions are allocated towards the principal, borrowers should specify how they want their excess payments divided. This can often be done through the loan servicer's online portal, where borrowers may find options to indicate "other amount" or "define your excess payment preference." If paying by check, borrowers can include "Apply to principal" on the memo line. However, it's important to note that lenders may be required to pay interest first, so borrowers should regularly check their online accounts to ensure that their extra payments have been correctly applied to the principal.
Borrowers can also consider refinancing their student loans to obtain better rates and potentially save thousands of dollars. Additionally, using a student loan prepayment calculator can help borrowers understand how even a small extra monthly contribution can reduce their interest burden over time. By combining these strategies, borrowers can proactively manage their interest accrual and work towards repaying their student loans more efficiently.
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Loan repayment plans
Repaying student loans can be a daunting task, but understanding the available repayment plans can help borrowers make informed decisions about their finances. Here is an overview of some loan repayment plans to consider:
Income-Based Repayment Plan
The Income-Based Repayment Plan (IBRP) is a popular option for borrowers seeking a sustainable repayment strategy. This plan calculates monthly payments based on the borrower's income, ensuring that payments remain affordable relative to their earnings. This plan can help borrowers avoid defaulting on their loans and provide a pathway to eventual loan discharge.
Income-Driven Repayment (IDR) Plans
IDR plans are another option for borrowers seeking flexibility. These plans also take into account a borrower's income and family size to determine monthly payments. IDR plans often include various sub-plans, such as Revised Pay As You Earn (REPAYE) or Pay As You Earn (PAYE), each with slightly different eligibility requirements and benefits. Borrowers can use the Loan Simulator to compare IDR plans and find the most suitable option.
SAVE Plan
The SAVE Plan, introduced by the Biden Administration, aimed to provide relief for borrowers by placing their federal student loans into forbearance with a zero percent interest rate. However, it has been deemed unlawful by federal courts. Borrowers enrolled in the SAVE Plan are encouraged to transition to a legally compliant repayment plan, such as the IBRP, to avoid negative consequences and ensure progress toward loan discharge.
Refinancing and Principal-Only Payments
In some cases, refinancing student loans can lead to better interest rates and more favourable repayment terms. Additionally, borrowers can explore making principal-only payments on their student loans to reduce the overall interest paid. This strategy can be achieved by specifying that any extra payments should be applied to the principal balance. Online tools, such as prepayment calculators, can help borrowers understand the impact of extra payments and how to allocate their funds effectively.
It is important to remember that the availability and suitability of repayment plans may vary depending on individual circumstances and loan types. Borrowers should carefully review their options, seek reliable sources of information, and stay updated on any legal or policy changes that may impact their loan repayment journey.
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Frequently asked questions
You can make a principal-only payment by asking your lender to make principal-only payments, which can be done through the servicer's online portal. You can also specify how you want your extra funds to be divided by looking for an option such as "other amount" or "define your excess payment preference".
Federal law dictates that payments to student loans are applied first to any accrued interest and then to the principal. This is also the case for federal and private loans.
You can ensure that your extra payments go towards the principal by specifying that you do not want to be put in "paid ahead" status. You can also include "Apply to principal" on the memo line if you pay your student loans by cheque.
