Published in: Student Loans | Oct. 16, 2019

A Simple Guide to Paying Extra on Student Loans

By:  Kailey Hagen

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Just mailing in extra money every month isn't enough.

Paying extra toward your student loans every month can help you get rid of them faster and save you money on interest in the process. But if you just send in a larger check every month, you might be disappointed by how little it seems to reduce your balance. That doesn't mean that paying extra is useless. You just have to know how to do it the right way.

A woman sitting on floor with paper bills and a calculator.

Image source: Getty Images

Why sending in more money every month isn't enough

Federal regulations state that your student loan payments are first applied to any collections charges or late fees on your account, then to any accrued interest, and finally to the principal. That's why it's so difficult to pay down your balance -- especially in the beginning. You have a large principal balance accruing interest rapidly and most of your initial payments are going almost entirely toward the interest without making much of a dent in the principal. 

And when you send an extra check in to your loan servicer, they will apply it to your account in this way. If you have multiple loans, they might spread the payment out across all of the loans so that the bulk of it goes toward interest and each loan's principal balance only decreases by a small amount. 

Your student loan servicer could also just hold onto any extra money you send it and apply it to your next month's payment. That means your bill will be smaller the next month, but the extra money you paid won't do what you intended it to do, which was reduce your principal balance, and by extension, the amount you pay in interest overall.

But that doesn't mean you're out of luck. It is possible to get your student loan servicer to apply your extra payments toward your principal balance, but you have to tell the company exactly what you want.

Decide which loans you want to target first

If you want to pay the least in interest overall, you should put all of your extra money toward your student loan with the highest interest rate first. Start by making a list of each of your student loans and their interest rates. If you have federal and private loans, you should make a list for each lender. Order your list so that the loan with the highest interest rate is at the top. If two loans have the same interest rate, place the one with the lower outstanding balance first.

This is the order in which you should apply your extra payments to your loans. But you can't forget to make at least the minimum monthly payment on all of your loans, otherwise your servicer will slap you with late payment fees.

Outline how you want your extra payments applied

Once you've got a plan of attack, you need to tell your student loan servicer how you want it to handle the extra payments that you send. Send in instructions to your loan servicer indicating that:

  1. You would like the servicer to first apply your payments to the minimum payment on all of your loans. 
  2. You would then like the loan servicer to apply any extra money to the principal balance on your loan that has the highest interest rate. 
  3. If multiple loans have the same interest rate, the money should go toward the loan with the lower balance first. 
  4. When a loan is paid off, any remaining money should go toward your principal balance on your loan with the next-highest interest rate. 
  5. If you refinance your loan, you'd like for any payments from another lender to be applied to your account in the same manner.

You can email this to your loan servicer or send it by certified mail to verify that the company has received it. Save a copy of these instructions for future reference. 

Send in the check

Once you've sent in your instructions, you can send in a single, larger check every month if you'd like. Your student loan servicer should apply the extra money in the manner above. But if you're concerned that the company might have missed or failed to heed your instructions, another option is to send your regular check every month for the minimum payment. Then, send in another check a few days later.

Breaking it up like this reduces the possibility that your loan servicer accidentally applies your extra payment to your balance incorrectly. Make sure you get your minimum payment in by the due date to avoid a late payment fee.

It doesn't hurt to add "Apply to Principal of Loan #XXXX" to the memo line if you're sending in a physical check or to the comments section if you're paying online, just to make it even clearer to the lender that you want the extra you're paying to go toward your principal balance.

Follow up

Once you've made an extra payment, check that the lender has applied it properly. Most student loan servicers should have an online portal where you can view your balance and payments. If you notice anything amiss, like your payment not showing up or that your extra payment has been applied to multiple loans instead of the one you requested, reach out to your loan servicer. Explain what happened and reiterate your instructions to them. Request that it apply your payment correctly and recalculate your balances and interest charges accordingly. 

It's tiresome to do this every month you pay extra, but it's important. Otherwise, your loan servicer might spread your extra payment across several loans or apply it to a future payment, which significantly reduces how much you benefit from paying extra.

It's not always the right decision

Paying extra on your student loan payments makes sense if you're on the standard 10-year repayment plan, but it might not be the best choice if you're eligible for public student loan forgiveness (PSLF) or teacher loan forgiveness. These programs will forgive any outstanding balance after you meet the requirements, so paying extra each month just reduces the amount the government would have to forgive on your behalf. You're better off just paying the minimum each month and letting the government take care of the rest.

For most students, extra student loan payments can save them quite a bit over the long run, but you must make sure your loan servicer is applying your extra payments correctly. Follow the steps above to ensure that everything goes smoothly.

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