Paying off your student loans is no easy feat. It can be hard enough to fit the minimum monthly payments into your budget. And if you want to pay them off earlier, you’re left to navigate the various types of loans and interest rates in order to determine your best options.
One helpful step in cutting through the confusion, getting organized and creating a repayment plan is understanding your various student loan “amortization tables.”
An amortization table breaks down every single one of your student loan payments over the life of your loan, showing how each payment is split between principal and interest. It also shows you how much interest you’ll pay over the life of the loan and how quickly your loan will be paid off.
It’s vital information if you want to pay off your student loans as quickly as possible. Read on to find out how amortization tables can help you do just that.
Understanding a student loan amortization schedule
Amortization is simply the process by which your loan payments are split between interest and principal. That split determines how quickly your loan is paid off and how much interest you pay over that period.
“When you take out a student loan, you’re borrowing a certain amount of money that needs to be paid back,” said Lauryn Williams, CFP and founder of Worth Winning. “And the lender also needs to get some kind of return, which is where interest comes into play. So your payments have to balance paying back the loan and paying interest, so that by the end of the loan term the entire debt is paid.”
The catch is that each payment differs in how it’s split between principal and interest. This happens for two main reasons:
- Each payment is first used to pay off any interest that has accrued since the last payment, with the remainder used to reduce the loan principal.
- The accrued interest is typically highest at the beginning of the loan repayment period, when the loan balance is also at its highest.
What that means is that a significant portion of your initial payments will go toward interest. But over time, as you continue making payments that decrease the loan balance, less interest accrues between payments, and so more of each payment can go toward paying down the principal.
An amortization table is simply a graphic that shows you exactly how each payment will be split between principal and interest over the life of the loan.
Here’s an example that shows the first six payments and last six payments of a $10,000 student loan with a 6.8% interest rate during a 10-year repayment period:
|Sample Student Loan Amortization Table|
Based on someone with a $10,000 student loan at a 6.8% interest rate over a 10-year (120-month) repayment period.
Your monthly payment
Portion of the payment that goes toward principal
Portion of the payment that goes toward interest
Total interest paid so far
Remaining loan balance
As you can see, the initial payments are split roughly 50-50 between principal and interest. But by the time those last few payments are made, the amount going toward principal has increased to almost 100% of the monthly payment.
A full amortization table would show exactly how much is going toward principal and interest for each of the 120 payments, as well as what your remaining loan balance is along the way. This helps you understand exactly how your student loan will be paid off over time.
A student loan amortization table also helps you understand the total amount of money you’ll be spending over the life of the loan. In the example above, you can see that you would pay a total $3,809.64 in interest over 10 years, in addition to the $10,000 needed to pay back the principal.
“You really need to think about the long-term cost of the money you’re borrowing,” said Williams. “An amortization table makes it easy to see the true cost of the loan in a way that you can understand.”
That cost can be incredibly high, especially if you’re borrowing large amounts of money and paying it off over extended 20- to 25-year time periods. Clint Gossage, CFP and founder of CMG Financial Consulting, sees this often with professionals who have borrowed hundreds of thousands of dollars.
“In some cases, the total amount of student loan payments may be several times your current balance by the time it’s all paid off in the end,” said Gossage. “It’s important to understand how long it’s really going to take to pay back your loans and how much it’s going to cost.”
Amortization and income-driven repayment plans
If you’re enrolled in an income-driven repayment plan, your payment is based on your monthly income, and it may fluctuate over time.
This can lead to unpredictable amortization, and in some cases your monthly payment might not be enough to cover all of the interest that accrues. That’s called negative amortization, and how it’s handled depends on the type of loan and the repayment program you’re participating in.
- For subsidized loans under REPAYE, the government will pay all remaining interest for up to three consecutive years from the start of your REPAYE plan. After that, the government will pay half of the remaining interest on subsidized loans.
- For unsubsidized loans under REPAYE, the government will pay half of remaining interest during the entire life of the loan.
- For subsidized loans under PAYE or Income-Based Repayment (IBR), the government will pay all remaining interest for up to three consecutive years at the beginning of your repayment plan. After that, unpaid interest will accrue without any government assistance.
- For unsubsidized loans under PAYE or IBR, unpaid interest will accrue from the beginning without any government assistance.
Steps to beating the student loan amortization schedule
If you’re looking at your student loan amortization table thinking that it will either take too long or cost too much to pay off your student loans, there are a few strategies that could accelerate your repayment. Doing so can not only save you money, but it can free up money for other goals.
“The biggest benefit of paying off your student loans early is that it frees up cash flow to do the things that you want to do with it, whether those are lifestyle choices or investing for your future,” said Gossage. “Not to mention the big relief that comes from having the weight of those loans off your shoulders.”
Here are some strategies that could help you beat your student loan amortization table and pay your loans off faster.
1. Cut back on other expenses
One of the best ways to find more room for student loan payments is to simply look at your other expenses and find places to scale back.
“I find that your car and housing are two big expenses that people are able to cut back on,” said Williams. “If you can get a roommate or trade in your $700 per month car payment for a $3,000 jalopy, it can make it a lot easier to pay off your loan.”
Williams said that while these changes might be difficult to make, the long-term benefit can be huge.
“You have more time than you might think for other goals if you really focus on this for a short time period,” Williams said. “If you do what you need to do to get those student loans off your back, you can free yourself up to really do the things you want to do.”
2. Automate extra payments
If you have the room in your budget to make regular extra payments toward your student loans, automating those payments helps to make sure they happen consistently.
“One of the best things you can do is make sure that every time you get paid, the first thing you do is send a payment to your student loan,” said Williams. “If you can do that with just a few clicks, then why not?”
Automating your payments allows you to make consistent progress and it frees you from the burden and stress of having to remember to manually make those payments each month. And if you have private student loans, lenders will often give you a discount on your interest rate if you sign up for autopay.
3. Refinance (with caution)
If your student loans have higher interest rates, refinancing could be a good option to explore.
“Interest rates are very high if you have federal loans, typically between 6% and 8%,” said Gossage. “If you use one of the private lenders out there, you could get a much more competitive rate.”
You need to be cautious, however, especially before deciding to refinance federal loans. Federal student loans include a number of protections that aren’t typically offered by private student loans, such as the ability to enroll in income-driven repayment programs, have some of your debt forgiven and temporarily postpone payments if you run into financial difficulty.
“Once you’ve moved your loans from federal to private, that’s a forever move, and you need to be really committed to paying your loans off,” said Williams. “If you owe more than 1.5 times your annual salary in student loans, then refinancing from federal to private might not be a good idea.”
However, the decision to refinance is a lot easier if you’re starting with private loans.
“If you already have private loans in place and you’re thinking about refinancing, you should usually go for it if you can get a better interest rate,” said Williams.
Check out our top picks for refinancing your student loans.
4. Prioritize higher interest-rate loans
There are two schools of thought when it comes to paying off debt.
The debt snowball approach argues for paying the lowest balance loans first, since doing so will provide the motivation you need to keep going. The debt avalanche approach argues for paying the highest interest-rate loans first, since doing so will save you the most money and pay off your loans more quickly.
“It really depends on how you’re mentally ready to deal with your loans,” said Williams. “A lot of people enjoy paying the smallest loan off first so that you can feel like you got a big win. But if you have the ability, it’s usually best to go after the highest interest rate first.”
You can use this tool to run the numbers yourself, but directing extra payments to your student loan with the highest interest rate is generally the most efficient route.
5. Take advantage of income-driven repayment
You may be eligible for income-driven repayment if you have federal student loans. These programs adjust your monthly payment based on your income. They also offer the opportunity to have some of your loan balance forgiven down the line, and they can make it easier to prioritize your payments toward your most expensive loans.
“Staying on an income-driven plan like REPAYE can give you a low monthly payment, and then any free cash flow you have can go toward the highest interest rate first,” said Gossage. “That’s a good way to make progress if you only have a little bit of extra cash flow to put toward your student loans.”
Gossage also stressed the potential benefits of student loan forgiveness under these plans, especially if you qualify for Public Service Loan Forgiveness.
“It still takes 10 years to get your loans forgiven, but in that time you can be in an income-driven plan that minimizes your payments and frees up cash flow to do other things,” said Gossage. “Instead of putting all your money toward student loans, you could be saving for retirement, saving for a down payment on a house or making progress toward one of your other long-term goals.”
Making student loan amortization work for you
Student loan amortization isn’t the most exciting topic in the world, but it is key to understanding the long-term cost of your student loans, as well as how to pay them off as quickly and efficiently as possible.
With the right payments to the right loans at the right times, you can save money and get to being debt-free a whole lot sooner.