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Updated on Tuesday, October 30, 2018
If you want to pay off student loans faster, making extra payments is one of the smartest ways to do so. Beside knocking off some of your debt early, you’ll also pay less interest on the smaller remaining loan balance, saving you money over the life of your loan.
Paying extra on student loans and making it count, however, can be a little more complicated than just sending in an additional check. These extra payments are often applied in less-than-optimal ways that keep you from getting out of debt sooner, and in some cases they can even increase the amount you repay.
This can leave you frustrated and wondering why your prepayments aren’t making the dent you’d expected in your student loan debt. Here’s what could be going wrong with your extra student loan payments, and what you can do to make it right.
Common ways extra student loan payments get messed up
Every borrower should be aware of common errors and issues that can arise when paying extra on student loans. Reviewing these problems will ensure you know what to watch for when you prepay student loans.
Here are some frequently encountered issues surrounding extra student loan payments.
Student loan payments are applied to interest first
Perhaps you’ve been sending an extra payment every month a couple of weeks after paying your monthly bill. But to your surprise, the student loan balance hasn’t decreased by the full amount you sent in.
The reason that your payments don’t seem to go as far comes down to student loan interest. Payments you make toward student loans are almost always first applied to outstanding interest and fees, and principal second.
So an extra payment will be used first to pay interest charges, which are assessed based on your daily balance. Only then is the leftover applied to the principal.
Extra payments are credited against future payments
Perhaps you notice something even weirder — you make an extra payment, and then your due date is simply pushed back. What gives?
Some student loan servicers or lenders will credit extra payments toward a future payment, according to the Consumer Financial Protection Bureau. Most student loan servicers, such as Nelnet, will apply the extra payment to a student loan principal, but then advance the due date for you next payment.
Having your due date moved back isn’t always ideal, however, especially if you’re making extra payments so you can get out of debt faster. A delayed payment could throw off automatic payments set up by your servicer, for instance.
You might have to manually send in your extra payment to keep things on track. And if you choose not to make your next payment as usual, the payment you’re making isn’t exactly “extra,” but simply made early.
Lenders reset monthly payments
When a redisclosure happens on your loan, your loan is re-amortized under a new loan schedule which can cause your monthly payments to rise or fall. Most often, however, lenders will lower monthly payments that will repay the new balance under the old loan term.
This actually occurred with my husband’s private student loans, after we started making extra payments on these each month. It wasn’t much — the minimum was around $260 per month, and we simply rounded payments up to an even $300.
But then something unexpected happened: Every month, we’d get a notice that our minimum payment had been recalculated and ever-so-slightly lowered. If we made this new, lower minimum payment, we’d pay off the loans under the original 20-year term.
While having the option to pay less seemed nice at the time, we never did. Following the new, lower payments would have meant paying more in interest and spending more time in debt than we wanted.
Extra payments aren’t applied to the preferred loan
Most students borrow as they advance through school, originating one or two different loans per semester. This means that most borrowers’ student debt is spread across multiple loans.
If you have the same servicer for multiple student loans and make an extra payment, however, it won’t be obvious to the servicer how you want the payment applied. In most cases, the servicer will split the extra payment across your student loans.
This can cause issues, however, if you want to target one balance at a time — an action at the heart of popular payoff strategies, such as the debt snowball or debt avalanche.
The debt avalanche method, in which you pay the highest-interest loan off first, can be especially effective in slashing the total amount you pay in interest on your student debt. Consider this example from the CFPB in which a borrower who, a year into repayment, begins paying $100 extra each month on three student loans, each with a balance of $10,000 but with varying interest rates.
|Starting Balance||Standard monthly payment without extra $100||Monthly payment if extra $100 split evenly among loans||Monthly payments if extra $100 applied to highest-rate loan|
Loan 1 (7% interest rate)
Loan 2 (9% interest rate)
Loan 3 (13% interest rate)
Total Monthly Payment
Savings at Payoff
$4,514.98 saved over life of loan
$5,403.62 saved over life of loan
The difference is real: If the borrower tells their servicer to apply the extra $100 payments to their highest-interest loan, they will pay nearly $900 less in interest than if they were divided evenly across all three loans.
5 tips to make extra student loan payments without a hitch
Now that you’re aware of common issues that can come up when paying extra on student loans, you might be wondering how you can avoid them.
Here are five steps you can take to ensure your student loan payments are applied exactly when, where and how you’d prefer.
1. Find your lender’s policy on prepayments
One of the first things you should do is get familiar with your servicer or lender’s policy for applying extra student loan payments (often called prepayments). Usually, this policy will spell out the lender’s standard method of applying any extra payments made above and beyond the monthly minimum.
For example, you’ll know whether extra payments are divided up proportionally across all outstanding loans (as with FedLoan) or applied first to the highest-interest loan (as with NelNet). You’ll also get a heads up on whether the student loan servicer will advance your due date or redisclose your loan if you prepay on this debt.
2. Instruct your servicer how to apply extra student loan payments
Just because your servicer has a policy for handling extra student loan payments doesn’t mean you’re stuck following it. Simply tell your servicer how you’d prefer your extra payments to be applied, and most will comply.
All it takes is sending a letter to your lender with instructions on how you’d like it to handle all excess repayment. Here is a student loan payment instruction sample you can follow, provided by the CFPB. (And here is the full sample letter.)
I am writing to provide you instructions on how to apply payments when I send an amount greater than the minimum amount due. Please apply payments as follows:
- After applying the minimum amount due for each loan, any additional amount should be applied to the loan that is accruing the highest interest rate.
- If there are multiple loans with the same interest rate, please apply the additional amount to the loan with the lowest outstanding principal balance.
- If any additional amount above the minimum amount due ends up paying off an individual loan, please then apply any remaining part of my payment to the loan with the next highest interest rate.
It is possible that I may find an option to refinance my loans to a lower rate with another lender. If this lender or any third party makes payments to my account on my behalf, you should use the instructions outlined above.
Retain these instructions. Please apply these instructions to all future overpayments. Please confirm that these payments will be processed as specified, or please provide an explanation as to why you are unable to follow these instructions.
This letter is just a template, so feel free to make any adjustments you see fit. For example, if you have unsubsidized loans and subsidized loans with the same interest rate, you might instruct your lender to apply payments to the unsubsidized loan first. Or, you might want to instruct your servicer not advance the due date when you make extra payments.
You can also add instructions specific to any individual extra payment if you’d like it applied differently than the servicer’s policy or your previous instructions.
3. Select corresponding payment options
Fortunately, many student loan servicers and lenders are making it easier for borrowers to clarify how they want extra payment applied.
Nelnet, for example, will display a box that reads “Do not advance due date.” If you leave it unchecked, your due date will be moved back in line with how much extra you’ve paid. Select NelNet’s “Do not advance due date” option, however, and the payment will be applied without affecting future payments.
Similarly, FedLoan allows borrowers to pay off extra on a specific loan by “targeting” their payments. By doing so, you get to select exactly the loan you want to pay extra on and indicate that you don’t want this amount applied toward a future payment.
For borrowers who prefer to pay by paper check, you can still provide instructions with your payment. Simply write the instruction on the memo line, such as “Apply to highest-interest loan only” or “Do not advance due date.” Or you can write them on a separate paper to mail with the check, and simply indicate on the memo line to refer to the enclosed instructions.
4. Keep records of all instructions and payments made
Even if you’ve done your part to communicate with your lender, your responsibility doesn’t stop there. You’ll want to keep excellent records of any extra payments you make.
- Save copies of any instructions you send to your lender about how to apply extra payments, along with any confirmation or response it sends you in return.
- Keep proof of payment for all funds you send to your student loan servicer. Keep copies of any check you write. Take screenshots of any confirmation or other messages that display after making an extra payment online.
- Check that payments are processed without a hitch. Review statements sent to you by your lender, and make sure that any payments and changes to your principal listed are in line with your own records.
5. Contact your student loan servicer
If you ever run across anything that doesn’t match up, reach out to your lender or servicer as soon as possible. They can review your account, see where the discrepancy is arising, and resolve any issues so you can reap the full benefits of your extra student loan payments.
While some borrowers have issuers with their student loan servicer, many others make extra payments with no trouble at all. By keeping an eye on your student debt and applying these tips, you can ensure your student loan payments go further toward getting you out of debt.