So you’ve stocked up an emergency fund, have your credit card debt trending toward zero and are contributing to your retirement account with each hard-earned paycheck. Congrats! You’re well on your way to a healthy financial foundation.
Now, to tackle that pesky student loan debt once and for all.
If your current pay-down strategy is simply paying the minimum due each month, take a look at your budget to see if you have the wiggle room to devote more to your student loans. If you do, and you’re on a standard 10-year repayment plan, it might be time to implement a new strategy that can help you pay off your debt faster: Making an extra payment each month. (Keep in mind, however, that those on an income-driven repayment or loan-forgiveness plan should assess whether it makes sense for them to do this, as in the long run they may not be required to pay off their full balances.)
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Even a small additional amount could make a sizable dent in your debt because you’re ultimately helping lower the amount of interest you'll pay over the lifetime of the loan. Plus, most educational loans, both federal and private, allow for penalty-free prepayments. That means you can make as many extra payments as you like without having to pay a fee.
If you have multiple student loans and you’re not sure where to start implementing this pay-down strategy, consider targeting private loans and loans with the highest interest rates first. Then once you’re ready to start making additional payments, keep these steps in mind to make the process more efficient and effective.
Step 1: Make Your Regular Payment on Time
This may seem like a no-brainer, but you’ll want to first make your regular monthly minimum payment by the due date. Most loan servicers or lenders make this easier by allowing you to pay online, but even more convenient is auto-pay. If your lender offers this option, consider enrolling, says student loan consultant Jan Miller, founder of Miller Student Loan Consulting. Not only are you less likely to miss a payment, a lot of lenders will reduce your interest rate slightly, typically by .25%.
If you must pay by check, be sure to send it in at least a week before the due date to allow enough time for processing.
Step 2: Schedule Your Extra Payment Right Away
A day after your regular monthly payment is posted, it’s time to make your extra payment. Why so soon? Under federal regulation, except in the case of income-based repayment plans, lenders apply your payment first to any late charges accrued or collection costs owed on your loan, then to any outstanding interest accrued since your last payment and finally to your principal. Private lenders, while not governed by federal regulation, tend to follow suit and apply payments in the same manner, Miller explains.
As such, paying the extra amount as soon as possible after your regular due date leaves less time for unpaid interest to accrue—that way, the highest amount of your extra payment can go toward the principal. To make it easier to remember to make the extra payment, schedule a recurring bill-pay for your desired amount from your personal bank account to post the day after your due date, Miller adds.
Why go through the additional step of setting up auto-pay and bill pay? As Miller explains it, most, if not all, student loan servicers only allow the auto-payment to equal that of the minimum amount due. That means if you want to pay more than that, you will have to do it manually.
If you aren't enrolled in auto-pay with your lender, you could also simply pay more than is required each month by your regular due date.
Step 3: Make Sure You Aren’t Advancing Your Next Payment Due
Before you hit the “pay now” button on your extra payment, you have to establish that it should be applied to your loan right away, rather than being treated as a payment for next month that you’re sending in early. Otherwise, that extra amount may only advance the due date for your next payment rather than help lower your principal right then. If you’re paying online, your servicer will likely give you the opportunity to opt out of advancing the due date when you make an overpayment.
If paying online isn’t an option or you can’t confirm through the website how your payments are being applied, calling in to a representative to process your payment over the phone is the next best option, says Miller.
That way, you can communicate that you do not want to advance your next payment, as well as specify which particular loan you are targeting the extra payment for. (If you don’t do this and you have multiple loans under one lender, they may end up spreading out the overpayment among all the loans.) “It’s a pain and you might have to call once a month, but it’s the only way to really ensure that your payment gets applied properly,” he adds.
Mailing in your extra payment should be a last resort, warns Miller, because you open yourself up to a greater chance the lender will not process the payment as requested. But if snail mail is your only option, be sure to note which loan the extra payment is for by writing the loan ID number on the check. And most importantly, include a cover letter with specific instructions that indicate how to apply your extra payment. You can download the Consumer Financial Protection Bureau’s sample letter to fill out and mail to your servicer.
One more thing: Miller suggests sending your check and cover letter to the lender’s physical address rather than to the standard payment address, because the latter is likely just a processing unit that may not be equipped to handle a more detailed request.
Step 4: Double Check Your Statement
After making your extra payment, go through your next statement with a fine-tooth comb to ensure it was allocated correctly, Miller says. After all, “you won't really know how interest is applied until the statement generates and pops it on there,” he explains. “So I would wait until the next statement is posted, then take out my magnifying glass and calculator and check.”
If they didn’t apply your extra payment correctly, contact the servicer to reprocess the overpayment as directed and re-confirm your instructions for next time.