Student Loans

How to Make Extra Payments to Pay Off Student Loans Faster

Learn how to reduce the total cost of borrowing and eliminate your student loans quicker.

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How Extra Payments Can Help Pay Off Your Student Loans FasterWant to pay off those student loans but don’t have the full amount to do so? By making extra payments, along with your regular monthly payments, you can reduce the total amount of interest you pay and expedite the repayments of student loans.

Unfortunately, making extra payments takes a couple more steps. It’s not as simple as it should be. Without following the specific steps required by your servicer, your extra payments may not be applied correctly.

The issue with making extra payments is that student loan servicers do not automatically apply the additional payment or overpayment to the principal amount. They use the extra payment as an early payment for the following month’s installment.

So you’re not reducing the principal amount and the interest you pay. You’re just prepaying based on the original repayment schedule.

Sound confusing? It can be and for good reason. When you reduce your principal amount with extra payments, it recalculates the repayment period and the total interest you’ll pay for the loan. This has a positive end result–you pay less interest.

The benefit of making extra payments towards the principal amount is to reduce the total interest you’ll pay. And pay off the loan faster.

To have extra payments count as extra payments instead of early monthly payments, you have to provide the servicer with instructions on how to handle your extra payment.

Notify Servicers on How Extra Payments Must be Applied

First, you don’t need to make an extra payment every single month to pay down your student loans faster. Make extra payments as your budget allows.

Second, ask the servicer about the instructions to make extra payments. When speaking with the representative, share how you want your extra payment applied to the principal balance. Then, inform the rep and request that all future extra payments received should be applied to the principal as well.

To have the extra payment applied correctly, ask your servicer what is required. In some instances, the request can be done when you make the payments online. However, with some student loan servicers, you may be required to call and speak with a representative each time. Ask how you can avoid this step when you make extra payments.

Take note that other student loan servicers may need a letter on file with your request to apply the extra payments to the principal.

Lastly, I want you to understand that extra payments may affect the amount shown on the Current Amount Due. You may see no payments are required but continue to make repayments and extra payments as desired.

How to Properly Make Extra Student Loan Payments

For example, you have a $200 minimum payment but can afford an extra $50. When you set your payment for $250, the lender may count the $50 overpayment towards next month’s payment.

Follow these steps to ensure your extra payments are applied correctly:

  1. Make the regular monthly payment by the due date so you avoid late fees.
  2. Indicate the extra payment is a payment towards the principal balance, not an early payment of next month’s bill.
  3. Make the extra payment the same day as your regular monthly payment. This ensures your regular payment satisfies the accrued and unpaid interest so that your extra payment is applied directly to the principal balance.
  4. After the payments have processed, review your account to ensure the repayments were processed correctly. You should see the accrued interest paid with your normal monthly payment and the extra payment has reduced your principal balance.

For example, your $200 standard repayment with $50 extra payment is applied as so:

  • $190 repayment to accrued interest
  • $10 repayment to the principal balance
  • $50 extra payment to the principal balance

If fees apply to your situation, they will be paid first before standard repayments are applied to the principal balance.

  • $190 repayment to accrued interest
  • $5 applied to fees
  • $5 repayment to the principal balance
  • $50 extra payment to the principal balance

Paying extra may also reduce the Current Amount Due shown on your next billing statement(s). Even if there’s no required amount due on the billing statement, continuing to make payments will reduce the cost of borrowing.

It may be a bit of a hassle to make extra payments, but you’ll be glad you did.

In some instances, refinancing your federal and private student loans may be beneficial. It can reduce your interest and the total cost of the loan. However, keep in mind refinancing federal loans may cause you to lose benefits such Income Based Repayments, deferments, and loan forgiveness. To see how you can save with refinancing, review your student loan refinance options in the financial marketplace.

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Jason Vitug

Jason is the founder of phroogal, creator of the award winning project Road to Financial Wellness, and author of the bestseller and New York Times reviewed book, You Only Live Once: The Roadmap to Financial Wellness and a Purposeful Life.

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