Principal-Only Student Loan Payments: What to Know

While paying down student loan balances may be a priority among other financial obligations, it can be challenging to identify the most effective strategies. Making extra payments to the principal on student loans is a way you can free up funds sooner to apply to other financial goals — such as saving up for a down payment on a house.

As you consider this option, be sure you get a handle on what to know about making extra student loan payments on the principal only.

Each month you receive a student loan statement, which includes the principal and interest payment. The principal is the amount you borrowed, and the interest is what you’re paying to borrow the money. A principal-only payment is additional money you send in that solely knocks down the principal of the loan.

[READ: Tips for Successfully Making Extra Student Loan Payments.]

If you feel your monthly budget can allow for this option, there are four key considerations about paying only the principal on student loans:

— Understand the benefits of making principal-only payments.

— Know your rights as a borrower.

— Know the options and the process.

— Make sure the loan servicer or lender follows instructions.

Understand the Benefits of Making Principal-Only Payments

Making extra payments helps reduce the principal and accelerates your ability to pay off the student loan balance. Since the amount of interest you pay is based on your principal, you will pay less interest and enjoy significant cost savings.

This approach will improve your credit profile and credit history — which helps lower the cost of borrowing in other areas such as securing a car loan.

If you have multiple student loans, directing extra principal payments toward the loan with the highest interest rate saves the most money over time. If your loans have the same interest rate, you may decide to direct your extra payments to the one with the lowest balance first. This not only allows you to pay off that loan, but it also gives you a sense of accomplishment and motivation to stick with your debt-reduction plan.

[READ: How to Pay Off Multiple Student Loans.]

Know Your Rights as a Borrower

According to the Consumer Financial Protection Bureau, all student loan borrowers have the right to make additional payments, without any fees or penalties.

The bureau warns that student loan servicers and lenders may not always follow your instructions. If you become aware of inaccurate billing statements, conflicting payment information or incorrect payment processing, contact your loan servicer or lender immediately. Don’t be shy about escalating your requests by asking to speak with a supervisor or submitting a complaint.

Know the Options and the Process

As you pay off your student loan, you have the option to submit extra payments according to a schedule that works for you. You can request to make one extra payment as your budget allows, or set up a consistent monthly extra payment schedule. However you decide to make additional payments, make sure you contact your loan servicer or lender to check that your money is being applied directly to the principal.

Always put in writing your request to make extra payments. Your loan servicer or lender may also have an online option for you to use to indicate how the extra money, also called a prepayment, is applied. If you need help drafting the letter to your loan servicer, the CFPB offers tips and a sample letter.

If you provide clear instructions in writing, your loan servicer or lender is less likely to misunderstand how you want your extra payment or payments applied to your student loans. Again, this should be a secondary payment, so you may want to submit it a few days after your regular monthly payment to avoid any confusion.

Make Sure the Loan Servicer or Lender Follows Instructions

Once you have communicated with the loan servicer or lender in writing, double-check your monthly statement and account history to make sure your payments are being applied properly. This way, you can make sure you are on track with your repayment goals.

One additional thing: Make sure your loan servicer or lender does not lower the amount of a future monthly payment when you apply extra money to a monthly payment. This could lengthen the amount of time to pay off your student loan by working against your efforts to pay down the principal faster.

If you are able to manage it given your specific financial situation, principal-only payments are worth the planning and execution. In the long run, this strategy will save you money, build up your credit history and credit score, and keep you on the path toward a brighter financial future.

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Student Loan Default: What to Know

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Principal-Only Student Loan Payments: What to Know originally appeared on

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