Making extra payments on your student loans can help you save on interest and get out of debt faster. But if those extra payments aren’t applied to your principal, you might not see your balance go down. That’s why it’s crucial to know how to make principal-only payments on your student loans.
If you want to speed up your student loan repayment, here’s how to make sure that your extra payments are applied properly to make the maximum impact.
1. Figure out which loans you want to target
Before you can ensure your extra payments are applied correctly, you need to know exactly what your student loan strategy is. Which loan do you want to target first?
To figure this out, write down all your loans, including their principal amounts and interest rates. Consider whether you want to make extra payments on the loan with the smallest balance or highest interest rate first (these approaches are called the debt snowball and debt avalanche methods, respectively).
If two loans have the same interest rate, ask your loan servicer to apply your payment to the loan with the smallest balance first. This divide-and-conquer strategy works because it lets you focus specifically on obliterating one loan at a time, rather than just making a dent in your total loan balance. You can also use a student loan prepayment calculator to test the impact of your strategy.
At the same time, continue making minimum payments on all your loans, so that you don’t fall behind. Once you have a plan for your extra payments in place, you can ask your loan servicer to apply them correctly.
2. Talk to your lender
Every lender is different, but if you make a payment that’s more than the minimum without specifying where your money should go, your lender will decide how it’s divided.
Often, lenders will put your payment toward outstanding fees first, then interest and then your principal. To ensure your payments are making a dent in your balance, you need to ask your lender to make principal-only payments on your student loans.
You can start by calling your lender to discuss how to make principal-only payments. The Consumer Financial Protection Bureau has also created a sample letter that you can send to your lender via snail mail or email, if you want to use that.
Still, even with these instructions, 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 balance.
But once the lender makes any required interest payments, it should apply the remaining money according to your instructions.
3. Confirm extra payments are applied correctly
Depending on your loan servicer, you might be able to choose which loan receives your extra payments via your online account. In this example from Nelnet, you can review the details of your loans and direct a payment toward the loan you want to pay.
If you were using the avalanche method, you’d make extra payments on the loan with the 7.9% interest rate. If you were using the debt snowball, you’d target the loan with the $3,711.15 balance.
In your online account, you might also be able to select a “Do not advance the due date” option. This way, your payment won’t be used to cover the following month, but instead will be treated as the extra payment that it is.
If you do choose this option, make sure to keep up with monthly payments. Otherwise, you could fall behind and end up accruing even more interest. Signing up for autopay will help you stay on track.
If you decide to make extra principal-only payments on your student loans via a check in the mail, be sure to include “Apply to principal” on the memo line to ensure that you’re putting a dent in your loans.
You’ll notice in the sample letter above that there’s a paragraph about student loan refinancing. How exactly does refinancing help you pay your loans?
Well, refinancing involves exchanging one or more of your old loans for a new one with a private lender, such as a bank, credit union or online lender. This process can be beneficial if you can qualify for a lower interest rate.
Not only could you save on interest, but you could also choose a shorter repayment term to get out of debt faster. That said, refinancing federal loans can result in a loss of certain borrower protections, so make sure you understand the potential downsides before making changes to your debt.
If you decide that refinancing is the right move, compare offers from multiple refinancing lenders to find your best terms.
If you want to get out of debt as soon as you can, making extra payments is the way to go. But if you use this method, make sure you know how to make principal-only payments on your student loans so you actually see your balances decrease.
Come up with 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.
Rebecca Safier contributed to this article.
Interested in refinancing student loans?Here are the top 6 lenders of 2020!
|Lender||Variable APR||Eligible Degrees|
|1.89% – 6.66%1||Undergrad & Graduate|
|1.89% – 5.90%2||Undergrad & Graduate|
|2.25% – 6.09%3||Undergrad & Graduate|
|1.99% – 5.64%4||Undergrad & Graduate|
|1.98% – 8.55%5||Undergrad & Graduate|
|2.39% – 6.01%||Undergrad |
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1 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of October 1, 2020.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of September 9, 2020. Information and rates are subject to change without notice.
3 Important Disclosures for SoFi.
4 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 2.98% APR (with Auto Pay) to 5.79% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.64% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of July 31, 2020, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 7/31/2020. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.
© 2020 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
5 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of 5 years and is reserved for applicants with FICO scores of at least 810.
As of 10/15/2020 student loan refinancing rates range from 1.98% APR to 8.55% Variable APR with AutoPay and 2.99% APR to 8.77% Fixed APR with AutoPay.