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How to Make Principal-Only Payments on Student Loans
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Knowing how to make principal-only payments on student loans can reduce your amount of paid interest, helping you get out of debt faster.
But although many loan providers allow you to choose how extra funds are allocated, certain lenders don’t always make it so easy. Here’s a quick overview of how to make sure any extra contributions to your loan can have the biggest impact.
Note: 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 and no loans to be held delinquent or in default.
If your budget has room for extra student loan payments, you can follow these steps to pay down your loan’s principal. Doing so can potentially save you thousands of dollars.
1. Figure out which loans you want to target
Deciding which loan to tackle first can feel overwhelming, especially if you have significant student debt spread across multiple loans.
Start by listing all your loans, including their remaining balances and interest rates. Next, decide which payment method will work best for your specific situation.
Here are two popular options:
- Debt snowball: Work on paying off your smallest balance first. Even though this approach can feel counterintuitive, it’s effective by eliminating one loan at a time. By seeing loans drop from your list of debt, you may feel more motivated to pay off the rest. This method is good for getting some quick “wins.”
- Debt avalanche: Focus on the loan with the highest interest rate first. This method saves more interest over the life of the loan. However, it may be easy to lose motivation, since it could take awhile to see a major difference in your overall debt.
With either of these methods, you’ll need to continue making minimum payments on your other loans to ensure they don’t go into default.
If you’re feeling stuck, try using our student loan prepayment calculator to see how even an extra $20 a month can save you interest in the long run.
2. Contact your lender
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 divided.
You might also see an option for “Do not advance the due date.” Clicking this ensures your lender treats your funds as an extra payment instead of applying them toward next month’s bill (which they might do automatically if you don’t specify).
For anyone who pays their student loans via a check in the mail, 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 an extra $250 on your loans, the full $250 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.
3. Confirm extra payments are applied correctly
Check your online account or statements on a regular basis 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.
Most importantly, keep up with the minimum monthly requirements for all your loans — otherwise, they could end up delinquent, possibly hampering your repayment and hurting your credit rating. Signing up for autopay can help you stay on track.
Why make principal-only payments toward my student loan?
Paying extra on your student loan — and having that money go directly to the principal — can save you a significant chunk of money.
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 interest.
Now, if you increased your monthly payment to $500 a month (that’s an extra $97), you’d save $3,613 in interest over the life of the loan.
Another option to consider if you’re drowning in student debt is student loan refinancing.
With a student loan refinance, you exchange one or more of your old loans for a new one with a private lender, like a bank, credit union or online lender. This process can be beneficial if you have a solid credit score (or if you recruit a cosigner who does), since it might qualify you for a lower interest rate. In addition, you could choose a shorter repayment term to get out of debt faster.
That said, refinancing federal student loans can result in a loss of certain borrower protections, such as income-driven repayment and student loan forgiveness. Because of this, consider the potential downsides of refinancing before making changes to your debt.
Lastly, it’s worth comparing offers from multiple refinancing lenders to find your best terms.
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. Furthermore, 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.
Devise a clear strategy for paying off your student loans and communicate specific instructions to your lender for all your payments going forward. By taking these steps, as well as keeping an eye on your online accounts, you can ensure that your extra payments are applied correctly to your student loans.