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Making extra payments toward your student loan balance can help you pay off your debt sooner and reduce the total interest you pay. But simply paying more than your required monthly amount doesnât always mean the entire extra amount will immediately reduce your principal balance.
Student loan payments generally go first toward outstanding fees, then accrued interest, and then principal. You may also need to tell your lender or servicer how you want an extra payment applied. Otherwise, the extra money could be credited toward a future payment instead of immediately reducing your loan balance.
Hereâs what a principal-only payment means, how to make extra payments work toward reducing your balance, and what to watch out for along the way.
Key Points
⢠Principal-only student loan payments allow borrowers to directly reduce their remaining principal balance after outstanding fees and accrued interest are paid.
⢠Extra payments are generally applied first toward fees and interest before reducing the loan balance, so timing payments right after regular due dates can maximize savings.
⢠Borrowers may need to instruct servicers not to advance their due date to ensure extra funds immediately lower the principal rather than cover future bills.
⢠Targeting extra payments toward specific loans using strategies like the debt avalanche or debt snowball can accelerate debt repayment.
⢠Refinancing student loans may be another option to potentially secure lower rates or shorter repayment terms, though refinancing federal loans forfeits federal protections.
What Is a Principal-Only Student Loan Payment?
To understand principal-only payments, it helps to understand how student loan payments work.
When you take out a student loan, you agree to repay the principal balance, which is the amount you borrowed, plus interest, which is the cost of borrowing the money. Depending on the type of student loan, there may also be fees.
Once repayment begins, you generally make at least a minimum payment each month. Your payment is typically applied first to any outstanding fees, then to accrued interest, and then to your principal balance.
A principal-only payment refers to an extra payment that is applied to the principal after any outstanding fees and accrued interest have been covered. In other words, you can’t use an extra payment to skip interest that has already accrued. But you can often ask your provider to apply any amount remaining after those charges directly to principal.
You can generally make extra payments on student loans without a prepayment penalty. However, how those payments are applied can vary. One potential issue is “paid ahead status.” If you pay more than your required amount, your servicer may apply the extra amount toward a future payment rather than immediately reducing your principal balance. You can typically ask your servicer to apply the extra amount toward your balance instead.
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Why Making Principal-Only Payments Can Make a Difference
Paying down your principal balance can reduce the amount of interest that accrues over time. As a result, making extra payments can help you pay off your student loans faster and potentially reduce the total interest you pay.
You don’t necessarily have to make extra payments every month. If you receive a bonus, tax refund, cash gift or other windfall, you could use some of that money to make an additional payment toward your student loan balance.
Before making extra payments, though, itâs a good idea to consider your other financial priorities. You may want to build an emergency fund, pay down higher-interest debt, or take advantage of an employer retirement match before putting additional money toward a student loan.
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Common Mistakes to Avoid With Principal-Only Payments
Paying more than the minimum payment can help reduce your student loan balance, but there are several potential pitfalls to watch for:
• Forgetting the payment order: Student loan payments generally go first toward outstanding fees, then accrued interest, and then principal. So an extra payment may not go entirely toward principal if you have accrued interest or fees due.
• Allowing the account to go into paid-ahead status: Some servicers may apply an extra payment toward a future billing period rather than immediately reducing your balance. Itâs important to ask your servicer to apply extra payments toward your balance and, if available, select an option that prevents your due date from being advanced.
• Paying extra while pursuing loan forgiveness: If you’re working toward a federal student loan forgiveness program, making extra payments may not always be the best strategy. Paying down your balance faster could reduce the amount that would otherwise be eligible for forgiveness. Youâll want to consider your forgiveness eligibility and expected timeline before making large additional payments.
• Not specifying which loan should receive the extra payment: If you have multiple student loans, your servicer may have a default method for allocating extra payments. You may be able to direct extra money toward a specific loan, such as the one with the highest interest rate.
• Failing to check your account afterward: After making an extra payment, itâs important to review your account or statement to confirm that the payment was applied as you intended. Itâs also a good idea to keep records of payments and communications with your servicer in case you need to resolve an error.
How to Make Principal-Only Payments on Student Loans
The process for making an extra payment varies by lender and servicer. Hereâs an overview of whatâs typically involved.
Tell Your Lender Where to Direct Extra Payments
If you make payments through your loan provider’s website, you may be able to enter an amount above your minimum payment and specify how the extra money should be allocated. Some servicers also let you choose which individual loan should receive an extra payment.
In addition, you may see an option to prevent your due date from being advanced. If available, this can help ensure that an extra payment is treated as a prepayment toward your balance rather than simply satisfying a future bill.
If your online account doesn’t provide these options, contact your lender or servicer before making the payment. Ask how to have an additional payment applied to your principal after any outstanding interest and fees are covered.
If you want to make additional payments regularly, ask whether you can set standing payment instructions. Some servicers allow borrowers to establish payment-allocation preferences, but the options vary.
Apply Extra Payments Strategically
If you have multiple student loans, consider directing extra payments toward one loan at a time rather than spreading the money across all of your loans. Depending on your goals and loan terms, you may want to focus on the loan with the highest interest rate or the smallest balance.
Two common approaches are:
• Debt avalanche: With this strategy, you put extra money toward the loan with the highest interest rate while continuing to make the required payments on your other loans. This approach can reduce the amount of interest you pay over time.
• Debt snowball: Here, you put extra money toward the loan with the smallest balance. Once that loan is paid off, you move to the next-smallest balance. This can provide a sense of progress and motivation.
If your servicer allows you to choose which loan receives an extra payment, youâll want to make sure your payment instructions are clear.
Keep a Close Eye on Your Statements
After making an extra payment, itâs wise to check your online account or loan statement to see how the payment was applied. Confirm that the payment went to the loan and balance you intended.
If the payment wasn’t applied as expected, contact your lender or servicer right away. Be sure to keep copies of your payment confirmations and any communications about how you wanted the payment applied.
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Consider Refinancing Student Loans for Better Rates
Making extra payments isn’t the only way to potentially reduce your interest costs or pay off student loans sooner. Another option may be refinancing your student loans with a private lender, such as a bank, credit union, or online lender.
With student loan refinancing, you replace one or more existing loans with a new private loan. Depending on your credit and other factors, you may be able to qualify for a lower interest rate or choose a different repayment term. A shorter term could help you pay off the loan faster, although it generally comes with higher monthly payments.
You can refinance private student loans, and you can also refinance federal student loans with a private lender. However, refinancing federal loans means giving up federal benefits and protections, including access to federal income-driven repayment options and certain forgiveness, deferment, and forbearance programs.
Because refinancing federal loans is generally irreversible, itâs wise to compare the potential savings with the federal benefits you would give up before making a decision.
The Takeaway
Making extra payments toward your student loans can help you pay down your balance faster and reduce the amount of interest you pay over time. But an extra payment doesn’t necessarily go entirely toward principal. Outstanding fees and accrued interest generally are paid first, and your servicer may otherwise apply an extra payment toward a future bill.
If you want to make principal-focused payments, check your providerâs payment instructions and specify how you want extra money applied. If you have multiple loans, you can also consider directing extra payments toward the loan that best fits your repayment strategy.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it â by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
FAQ
What is a principal-only payment on a student loan?
A principal-only payment is an extra payment intended to reduce the principal balance of a student loan. However, payments generally must first cover any outstanding fees and accrued interest. Once those amounts are paid, any remaining amount can be applied to principal. Reducing your principal balance can lower the amount of interest that accrues over time and may help you pay off the loan sooner.
When is the best time to make a principal-only payment?
Generally, the best time to make a principal-only payment on a student loan is on or immediately after your regular monthly due date. Your standard monthly payment must first cover any outstanding fees and all interest accumulated since your last billing cycle before any money touches the principal balance. Because interest typically accrues daily, making your extra payment right after your regular payment can help ensure that your accrued interest is sitting at zero, allowing all of your extra funds to go directly toward reducing the principal.
How can I ensure my extra student loan payment is applied to the principal?
The first step is to make sure any required payment and accrued interest are covered. Then check whether your lender or servicer lets you specify how an extra payment should be applied. You may also be able to select the specific loan that should receive the additional amount and prevent your due date from being advanced. If these options aren’t available online, contact your lender or servicer for instructions.
Can I make principal-only payments on federal student loans?
You cannot make strictly âprincipal-onlyâ payments on federal student loans. Federal regulations require payments to cover fees and accrued interest before applying to the principal, meaning you cannot skip outstanding interest.
However, you can direct extra payments toward your principal by:
• Paying the minimum first to clear monthly interest
• Instructing your servicer not to advance your due date (opting out of “paid ahead” status)
• Targeting specific loans with the highest interest rates using your servicer’s online allocation tool.
This can help ensure your extra funds reduce the principal balance immediately.
How much can I save by making principal-only payments?
The amount you can save depends on your loan balance, interest rate, remaining repayment period, and how much and how often you pay extra. Generally, reducing your principal sooner means less interest can accrue over time. You can use a student loan repayment calculator to compare your expected total interest with and without additional payments.
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