Does it feel like you'll never pay off your student loans? I have so been there.
By the time I got serious about paying off my student loan debt, the money I owed had swelled into thousands more than the original $16,000 loan I took out. With the interest that had accrued, on top of the late fees I had amassed because of my carelessness, I was now looking at another barrier to becoming debt-free.
I had spent years paying the bare minimum on my student loan payment and hadn’t even made a dent.
Then I learned one important rule: if I wanted to pay my loans off in any reasonable amount of time, I needed to be paying more than my minimum payment.
How student loan payments are applied
Student loan payments can feel impossible to pay off if you’re paying the bare minimum.
That’s because to pay off a loan, you have to reduce the principal amount—that is, the original amount of your loan.
However, a monthly loan payment is applied to three things, in a very specific order:
- First, any late fees you’ve incurred.
- Then, the interest accrued on your loan.
- And finally, your principal loan amount.
Here’s an example. Let’s say you took out a student loan of $10,000 with an interest rate of 5%. Your monthly payment is $100, and last month you incurred a late payment fee of $35.
When you make your next month’s payment, the first $35 of your $100 payment will go to the late payment fee. You’ll then have $65 left to apply to your monthly payment. If your interest is about $41 per month, that means only $24 is applied to your principal.
With such a small amount of money going toward your principal every month, that can make it a long road to becoming debt-free.
Why paying above minimum matters
Each month when you make a payment with your loan lender, you will have an option to pay extra—and you should take it.
There are two big reasons that’s a good idea: First, you save money: the more you pay, the less interest is accrued. And second, you’ll pay down your debt faster.
When you pay extra, your lender will give you the option to have that additional amount go toward your principal or toward next month’s payment. Unless there’s a reason you need the amount to apply toward next month’s payment, like a big upcoming purchase, you should opt for paying on the loan principal.
The additional amount you pay each month will chip away at your principal, helping you get out of debt faster.
See also How to Pay Off Student Loans Faster.
How to pay more than the minimum
In my case, a new job that came with a significant pay bump made all the difference. I was able to start paying $1,000 a month on my student loans and made more progress in one year than I had in the more than five years when I was paying the bare minimum.
Obviously not everyone is going to get a sudden bump in income like I did. However, that doesn’t mean that you can’t use this strategy. Refinancing your student loans to a lower interest rate can help lower your monthly payment—making it a lot easier to pay more than the minimum.
Remember, even if you can only pay $20 or $30 extra, it’s worth it to help you pay down your principal quicker. You can always bump up that amount later if you have more leeway in your finances. To make it easy, set up automatic payments that include the additional amount.
Use our Student Loan Refinancing Calculator to find out how much you could save by refinancing your student loans. Many people are able to save over $200 a month and close to $20,000 over the life of their loans.