A few weeks ago, the Student Loan Ranger detailed that paying your interest before it capitalizes saves you money on your student loans. Now let’s look at how federal student loan payments are applied and how understanding the way this works can also save you money in the long run.
First, the basics: Federal student loans are heavily regulated, even down to the way payments are applied.
Loan holders are required to apply payments first to any outstanding fees, such as late fees, then to interest accrued to date and then to the principal. This requirement is similar to the way other types of consumer debt, including many mortgages, apply borrower payments. You can never request extra money be applied to the principal if you still owe accrued interest as of the date the loan holder receives your payment.
[Learn how anew student loan repayment process may help end confusion.]
The order in which payments are applied is why it seems at first that you are making little progress paying down your debt. At the beginning of the loan’s life, most of your payment will go to interest — assuming you are on a standard, level repayment plan — and very little will apply to the principal balance.
As you near the latter half of the loan term, however, you will notice that each monthly payment decreases your balance faster and that the majority of your payment goes to the principal of the loan. The reason for this? Math.
Remember, interest accrues daily on federal student loans. The common calculation for daily interest is the principal balance multiplied by the interest rate, which is then divided by 365.25 (don’t forget the leap year). This gives you the amount of interest your current outstanding principal accrues each day.
[Read more aboutthe new student loan interest rates.]
That daily interest accrues in its own accounting line and does not affect your principal balance unless — and until — that interest capitalizes. Let’s consider an example loan with a $50,000 balance and a 5 percent interest rate on a standard 10-year repayment term. Over a one-month period, $6.84 interest will accrue daily; on day 30, your accrued interest balance will be $205.20.
If you have no late fees to satisfy and no other outstanding interest remaining from a lower payment option, then your regular $530.33 monthly payment on day 30 will first pay the total accrued interest. The remaining $325.13 of the payment will go toward your principal, leaving you with a $49,674.87 loan balance and no accrued interest. Now instead of accruing $6.84 per day in interest, you will only accrue $6.80 in interest.
| Month | Payment amount | Amount to principal | Amount to interest | Total interest paid | New principal balance |
|---|---|---|---|---|---|
| July 2016 | $530.33 | $321.99 | $208.33 | $208.33 | $49,678.01 |
| August 2016 | $530.33 | $323.34 | $206.99 | $415.33 | $49,354.67 |
| September 2016 | $530.33 | $324.68 | $205.64 | $620.97 | $49,029.67 |
| April 2026 | $530.33 | $523.75 | $6.57 | $13,632.72 | $1,054.06 |
| May 2026 | $530.33 | $525.94 | $4.39 | $13,637.11 | $528.13 |
| June 2026 | $530.33 | $528.13 | $2.20 | $13,639.31 | $0.00 |
This first table shows your payment history if you make only the standard payment for 10 years — note there are a few differences in amounts due to rounding. The second table shows your payment history if you increase your monthly payment by $20.
| Month | Payment amount | Amount to principal | Amount to interest | Total interest paid | New principal balance |
|---|---|---|---|---|---|
| July 2016 | $550.33 | $341.99 | $208.33 | $208.33 | $49,658.01 |
| August 2016 | $550.33 | $343.42 | $206.91 | $415.24 | $49,314.59 |
| September 2016 | $550.33 | $344.85 | $205.48 | $620.72 | $48,623.45 |
| November 2025 | $550.33 | $544.84 | $5.49 | $12,959.34 | $772.33 |
| December 2025 | $550.33 | $547.11 | $3.22 | $12,962.56 | $225.22 |
| January 2026 | $226.16 | $225.22 | $0.94 | $12,963.50 | $0.00 |
Adding just $20 a month to your payment saves almost $1,000 in interest over the life of the loan. You will also pay your loan off five months sooner. Add $100 a month to your payment and you will save almost $4,000 in interest and pay the loan off by July 2024 — almost two years early.
There are a few more rules to be aware of if you are going to make extra payments toward your loan. Regulations require that any multiple of the required monthly payment push the due date of the loan ahead by the appropriate number of months unless the borrower specifically requests that it doesn’t.
Note that the payment applies the same way to principal and interest in either of the example scenarios. This is because you cannot pay interest before it accrues.
[Find outwhy student loan repayment may be the newest employee benefit.]
If you are making only part of an extra payment, such as in these examples, the due date won’t jump ahead until the total extra you have paid equals a monthly payment. So in our extra $100 example, every six months or so, the borrower’s payment due date would jump ahead one month.
Student loan payment application is one topic that can be very confusing to student loan borrowers. So, remember this basic tip to eliminate your debt faster: Paying a little extra each month — even if it is just money you saved by bringing your lunch to work or making coffee at home — can make your student loans significantly more manageable.
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Increase a Monthly Student Loan Payment to Save on Interest originally appeared on usnews.com
