If your federal student loans are currently in repayment, then you have a monthly payment plan. The benefits of paying off your loans fast are obvious — you accrue less interest, your debt comes off your credit report, and so on. Many students pay the minimum monthly payment and do not realize that students can actually pay more than is owed to pay off their loans quicker. It is a smart practice, and if you feel that you can allocate more of your income toward your monthly payments, you should contact your loan servicer to talk about your options.
There are two different options you can select when paying extra toward your monthly student loan bill. The first option is for your extra funds to not go toward future installments. Instead, any extra payment will go directly toward paying down the principal of the loan. For example, if your monthly payment is $100 and you pay $200, $100 of that will go toward your monthly payment, and the other $100 will go toward your principal. Doing this consistently is a great way to pay off your debt quickly while also accruing less interest.
The other option is for your extra money to go toward future installments. This would be a good idea if you come upon a large sum of money (maybe a bonus at work) and you would like to pay off the loan bill for the next few months. For example, if your monthly payment is $50, and you want to use your $200 bonus from work to pay off future installments, $50 would go to your current month’s installment and $50 would go to each of the next three payments. While this would not reduce the amount of time it takes to pay off the loans in full, it allows you to not have loan payments for the next three months.
Paying extra on loan payments is not always the right decision. If you feel comfortable paying the minimum monthly payment, then that is the option you should choose. However, if you have the available funds, and you would either like to pay down your principal amount faster (and accrue less interest) or get a reprieve for the next few payments, you should allocate those funds toward your student loans. The most important thing to remember is that you need to be clear with your loan provider about how the extra funds should be allocated. It is your responsibility to convey your intentions for the extra funds!
By Ryan Laspina
Compliance and Default Prevent Specialist at American Public University System