Principal-Only Student Loan Payment: What to Know

Paying off your student loans doesn’t mean just making the minimum payment every month. You can make a principal-only payment, or an extra payment towards your principal balance, to pay off your student loan debt sooner.

Here’s what a principal-only student loan payment is and how to make sure you’re doing it right.

What is a Principal-Only Student Loan Payment?

Your student loan is made up of your principal balance, or the amount you borrowed. It also includes interest, or what you pay for borrowing the loan, and fees determined by the lender.

Every month, you’re obligated to make at least the minimum payment on your student loans. That payment goes towards your principal balance, interest and fees.

On top of your monthly payments, you can make extra payments that go towards your principal balance. This money goes directly to the amount you borrowed, resulting in paying off your student loans sooner than if you only made the minimum payment each month.

Student loan interest charges are calculated per day based on the balance at that time. So if you make extra payments towards the balance, you’ll also pay less in interest over the life of the loan.

Is a Principal-Only Student Loan Payment the Best Option for Me?

If you’re thinking about making principal-only student loan payments, you’ll need to make sure you’re in a financially comfortable spot to do so. Think about making them if:

•  You can afford it. Not everyone is in a position to pay more than the required amount in any given month. If you’ve recently received a bonus at work, you can use that money to make an extra principal-only student loan payment. If you get a raise, you can pay more than the minimum amount due and put the extra money towards the principal balance.

•  You want to pay off your loans sooner. If you have the means to pay off your loans faster than your loan terms state, you can do that through principal-only payments. Not everyone is in a position to pay off their student loans before the final deadline. Some borrowers enroll in income-driven repayment plans, for example, that fit their income and expenses and provide loan forgiveness after a certain number of payments. But if you have the cash to do so, and you’re not working towards loan forgiveness, principal-only payments can help you pay off your loans fast.

•  You want to save on interest. You can save on interest by refinancing your student loans to get a lower interest rate. But there are other ways to save on interest. By making payments towards the principal balance, the daily interest that accrues on your loans will start to go down. There are also some instances where your interest will capitalize, or get added onto your principal balance. That’s when you’ll pay interest on top of interest. The less you owe on your principal balance, the less interest that will get capitalized.

Understanding Your Student Loan Repayment Rights

While the Consumer Financial Protection Bureau says all student loan borrowers have the right to pay off their loans as soon as they’d like, there are some circumstances when it can be much harder to do so. For instance, some lenders might institute redisclosure, which is when the lender resets your monthly payment and repayment term, often leading to a longer repayment period and more interest charged. This can happen for several reasons, including the sale of your loan to another lender.

Even if your loan is subject to redisclosure, you can always make extra payments without penalty; federal law prohibits prepayment penalties on both federal and private student loans. You can request that your student loan servicer apply your extra payments to a specific loan, such as the loan with the highest interest rate, in order to ensure you can save money and meet your payoff goals.

What to Expect From Servicers When Making a Principal-Only Student Loan Payment

Many lenders and servicers have online portals where you can make monthly payments. These tend to have options for setting up monthly autopay, making a minimum payment and paying the statement balance. You might also be able to set up standing instructions to pay a larger monthly payment and send the remainder of your payment towards the principal. Usually there’s also an option that says “other amount” where you can enter how much you want to pay towards your loan that month.

When you select this amount, you can then choose if this payment counts towards your monthly payment or an extra payment. Then you can select where that money gets applied, such as to the interest only, the interest and principal, or just the principal.

Some lenders might not have these options. Depending on your loan servicer, you might need to call to make a prepayment. It’s important to detail your request to the customer service representative as clearly as possible. Ask for a confirmation email or number so that you have a record of your request.

If you’re making a separate, principal-only payment, try not to make the payment at the same time as your regular monthly payment. That way the servicer is less likely to apply your second payment to next month’s payment, which would prevent you from saving as much money as possible in interest. Be as clear as possible with your lender about how you want your money handled.

It’s also a good idea to continue checking your account at least every month, if not more frequently. Set up email alerts for any change to your account, such as when a payment was made or you have a due date coming up.

If you can afford to make extra principal-only payments, it’ll help you reduce the interest you pay over the life of your loan. While it’s not required to make extra payments, the more you pay down your principal balance, the faster you’ll pay off your student loans.