One of the easiest methods to eventually boost your net worth is to pay off debt before it’s due. Your rate of return, in contrast to investing, is assured because it is the same as the interest rate on your loans. If you pay off $1,000 at 10% interest now rather than over the following 12 months, you’ll save around $100. Additionally, you’ll free up the monthly cash flow that was used to pay your debt.
The good news is that there are no prepayment penalties associated with student loans, which means you may accelerate the time until they are completely paid off. The bad news is that you might not advance toward an early payback date if you don’t know your lender’s regular procedure for applying extra payments. Here’s everything you need to know how to repay student loans.
- Payments are applied first to accrued interest and late fees.
The organizations that handle your payments, known as student loan servicers, typically apply your contributions to interest first, then to any late fees you may have racked up. The interest that has accumulated on your loan since your previous payment is known as accrued interest. The principal is the amount you borrowed initially.
Interest can also accumulate differently depending on whether a loan is government or private. Federal student loans have interest imposed just on the principle, according to a straightforward daily interest calculation. Private student loans often charge interest on both the principle and any outstanding interest using a compound interest formula. Due to the compound interest formula, which causes interest to accrue more quickly and makes loans more costly, paying off a loan early will help you save even more money.
Your accumulated interest is zero immediately upon the application of your normal monthly payment. Because your lender will have to put it entirely to principle, now is the perfect opportunity to make an additional payment. Additionally, the less principal you have, the less interest you will continue to pay.
● What Servicers Prefer
Student Loan Hero, a website that teaches debtors how to repay student loans and better manage their student debts, was created by Andrew Josuweit. There are two choices available for making an additional payment, according to Josuweit. “Your money may be used toward a future transaction. For instance, if your monthly payment is $250 and you send in a $100 payment, that $100 will be deducted from your subsequent $250 payment. Consequently, your bill will be $150 when it’s due. You won’t be able to pay off the debt more quickly because of this default.
If your loan is paid off early, you might not have to make any payments for a month or longer to stay current and avoid late penalties on your debts. However, neither the total number of months required to repay your loan nor the total amount of interest you must pay before it is paid off will vary. This method of applying extra payments optimizes the amount of interest that the lender will be able to receive from your loan, which is why it is best for them. You should not do that, without a doubt.
● Tell Your Lender How To Handle Extra Payments
The system used by the servicer to handle and how to repay student loans may be set up to automatically apply excess payments as prepayments or to your lowest-interest loan first. You want them to use the extra payments to lower your amount and start by paying off your loan with the highest interest rate.
You could have the opportunity to select how the money is applied at the time of payment if you pay online through the servicer’s website. However, the Consumer Financial Protection Bureau (CFPB) advises that you set up a standing instruction on your account outlining how you want additional payments to be applied if you pay by check, online bill pay, or auto debit.
You’ll probably run into issues if you don’t. Each year, the CFPB gets hundreds of complaints regarding student loan servicers, many of which concern additional payments not being applied as requested by borrowers. The CFPB offers a sample template so that you won’t have to create instructions on your own and stress about whether you’re doing things correctly.
Give your lender one copy, and preserve one for your records. Verify that your servicer has acknowledged receiving your instructions; if not, follow up.
Final Thoughts on How To Repay Student Loans
Your student loan amount will eventually drop to zero as a result of the short-term sacrifice you make by contributing more money to them. You will then just need to do one thing: ask your servicer for a letter confirming that you have paid off your loan entirely.
This letter may also be useful if, in the future, it seems that you haven’t fully returned your debts due to a computer malfunction or human error. You’ll be able to demonstrate that you no longer owe anything using your letter and account statements.