Getting the Most Out of Your Student Loan Payments

For most people currently under the age of 30, student loans are basically reality. We all know someone (or know someone who knows someone) who doesn’t have student loans, but for the most part, everyone we know has them. Some of our friends could be buried under them, and some could just have a little bit, but they are a reality for just about everyone. For me and most of the people I know, talking about going through school with zero loans is a waste of breath. We’ve been through school, graduated and moved on. The only thing that is really of interest now is how to get the balance of your student loans down as much as possible. If you can’t do that, you figure out how to refinance your student loans. I figured this out a while ago, I just was not sure if it was worth sharing or not. Depending on how you do things, it doesn’t really amount to that much savings, but what the hey, right – any time you can save even a bit of money on interest, you’re going to be better off in the end, right?

I’m not sure about your loans work, but with mine, they take your payment, use it to cover interest, then put the rest towards the principle balance. So say your minimum payment is $100 per month, and $45 goes to interest that has accrued since you last made a payment, so there is $55 left to put towards the principle. Usually, this won’t take your balance down that fast, so next month you’re going to have about the same situation. My family pays a little bit towards my student loan every month (which I’m very thankful for). After this had been going on for a while, I talked to my dad about trying optimize the payments so that more of the payments were going to the principal. Here’s what we do:

We usually make payments around the same time. They aren’t always credited on the same day, but they are usually very close. One payment takes care of the interest that has been piling up for the month, and the other one is basically free to dig into the principal. The best case scenario goes like this: Payment of $100 clears, and away goes $45 of interest and the rest goes into the principle. Now, there is currently $0 in interest on the loan, and it would start accruing at say $1.25 per day. Within the next 2-3 days, another $100 payment comes in. It pays $2.50 in interest, and sends the other $97.50 to the principle balance. This puts more money to the principle of the loan, reducing the amount faster.

While it’s not going to help you pay down your debt as fast as getting a second job, I’m a firm believer in the “anything helps” mantra.

Do you do something like this with your payments, or is this strategy news to you? Would you be willing to try it?

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16 thoughts on “Getting the Most Out of Your Student Loan Payments”

  1. I’ve noticed that if you fluctuate the date when you make your payment the principle paid is all over the map. It’s a good trick to make your payment on the same date each month and then, like you said, add a little extra.

    I posted over on Studenomics today that new graduates shouldn’t go too crazy trying to pay off their student loans right away. The interest rates are low and you need some time to get your life in order before crippling your monthly budget trying to double-up student loan payments.

  2. I haven’t begin to super charge the repayments yet (working on auto loan) but also understanding the amortization schedule that it is built upon may help.

  3. I agree with what you are saying, but if you just paid $200 the first time, that would be even more beneficial. Not that all of us have the money to do so, but most people struggling with student loans won’t have the finances to pay another $100 two days later either.

    I pay the max on my student loans $425/mo., crazy right? This is the plan for 10 years…I have some friends who have dropped their payments down so they can pay over 20 years. I wouldnt be comfortable doing this…but let me say, student loan interest is about as cheap a rate as you get, provided you have direct loans…paying down student debt may not be the most beneficial use of your money right now.

  4. I’ve gone back to school and am taking on some student loans, so what I’m trying to do is pay a small amount off every month. Most of those payments go to principal first while the interest accrues over time. If I can pay off a few hundred dollars before actually paying off the total amount, my total should be lower. My plan is to pay them off aggressively after that. Anything to get them paid off within a reasonable amount of time. 😉

  5. Paying off your student loans (particularly that last chunk) is quite freeing! While they typically don’t have a large interest rate, it’s still debt. I had $36,000 in student loans when I graduated 5 years ago, and just paid the last of them off in September 2010 (woohoo!). One thing that I did was consolidate them to an incredible 2.25% interest rate the summer I graduated. I did not consolidate in a $6,000 private student loan with the rest when I did this because it had a high interest rate and would have brought up the interest rate on the entire lump sum–did not make much sense. Instead, I paid the private student loan off more quickly.

    Good luck with your payments! That’s great your family is helping.

  6. My approach was to continue living like a student until they were gone. I had roommates and still had the crappy furniture and car I had in college. It really worked well for me although I know most people don’t choose this route for themselves.

  7. I’m not sure where people come from saying student loan debt carries low interest. I graduated just over a year ago, and my loan is sitting at 6.5%. My idea of low would be 3-4% max. Student loan debt is average. Compared to auto financing, it’s huge.

    I agree with making extra payments, though, every little bit helps. We’ll be making extra payments on our mortgage starting in May.

      • @Jonathan – Some people have a bit lower than that…and im saying sub-5%, which is about the average mortgage rate. Quite honestly, consider the tax advantage of mortgage interest deduction, some people that exceed the AGI for student loan interest may be better off paying those down than their mortgage even. It really does depend on your own situation.

  8. Great idea, Jeff! I completely agree with your mantra that “every little bit helps.” I loved this article, and I’ll be forwarding on to a few friends. 😉

  9. I am still carrying around student loan debt from my graduation 11 years ago! I do try to pay it down by applying “found” money like a tax return or bonus to the principal. I know I can use the interest to my advantage at tax time, but I really just want to be free of the debt!

  10. We finally just looked at our total student loan balance from grad school the other night (we have it on automatic payment with e-statements, so we don’t ever have to look at the statements if we don’t want to). Even though we knew roughly what the number was, it still hurts to see it in black and white.

    At 5%, it’s still pretty hefty. It will probably be the last major bill we tackle (aside from the mortgage). I look forward to when we can start hammering away at it.

    • I agree – I ignored my student loan balance through undergrad, then started paying down some of the interest while it was in grad school. by the time I was done there, I had less than I had started with for undergrad, but had taken out more for grad school at the beginning. The interest rates are low, but I’d still rather be out of the debt.

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