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The Benefits of Paying Extra on Student Loans

Published November 19, 2021


Borrower Advice
Student Loan Refinance
Student Loan Repayment
Student Loans

Carrying student loans can a be a heavy load. What’s the best way to pay off student loans sooner?

Making extra payments on your student loans can help you pay off your loans more quickly. However, it isn’t as simple as just sending some extra money to your lender. It’s important to follow the necessary steps to ensure that your money is applied to your account correctly. In this article, we’ll discuss the different ways you can pay extra on your loans, what to consider before you do, the importance of instructing your lenders on how to apply your extra payments, and whether it’s worth it to make extra student loan payments at all.

How payments are applied to your loans

Payments are generally applied to your loans in a specific order. However, this can vary depending on your loan servicer and the type of loan. For example, with Laurel Road’s loan servicer, Mohela, payments are applied as follows:

  • Outstanding fees.
  • Interest: Interest is the amount you pay monthly to finance your student loan. It is calculated as a percentage of your principal amount.
  • Principal: Principal is your existing student loan balance amount.

However, for federal loans, payments under the Income-Based Repayment Plan are applied as follows:

  • Interest
  • Outstanding fees
  • Principal

With Mohela, outstanding fees are paid first, followed by current amounts owed. Payments are distributed evenly across all your loans unless you request otherwise. The order that money is applied to your loans matters, as we’ll see shortly.

Different ways to pay extra on your student loans

There are a couple of different ways to pay extra on your student loans. You can pay a little extra each month (with special instructions to your lender) or make a lump sum payment. Picking the method that is best for you will depend on where you’re at in life and your saving style.

Paying extra each month

By making a small extra payment each month, you’ll be able to repay your student loans faster. However, you need to tell your lender what you’re doing. Some lenders will automatically apply extra payments to the following month’s payment. To avoid this, ask your lender what you need to do to ensure that the extra cash is applied correctly. Depending on the lender, you may have to call, or write a letter with specific instructions.

Making a lump sum payment

If you find yourself with a sudden windfall, you might want to consider making a one-time extra payment on your student loans. If you’re able to pay off the entire loan, talk to your loan servicer and get a payoff quote. This will tell you the exact amount you’ll have to pay to wipe out your loans in one payment. If you want to use the lump sum to reduce your debt, let the servicer know you want to apply the payment to your balance.

Using cashback earned with your Laurel Road Cashback Card

Another way to pay down your loans is by using a cashback credit card such as the Laurel Road Student Loan Cashback℠ Card. This Laurel Road credit card offers the ability to redeem 2% cashback towards student loans with any eligible student loan servicers, or the option to redeem 1% cashback towards anything else1.

3 things to consider before paying extra on student loans

Here are 3 things to consider before you pay extra on your student loans.

1. Decide which loan to pay down first

The first step is to decide which loan you want to pay down first. There are two main debt payoff methods that can help you prioritize:

  • Debt snowball: With the debt snowball method, you pay off the smallest debt first and then work your way up to the largest. Thus, if you’re going to make extra payments, those payments will go to the smallest loan first. Once that loan is paid off, you’ll put extra money towards the second smallest loan. The debt snowball can be a good fit for individuals who need a little motivation on their journey to pay off their student loans. Knocking off your loans one by one can be very encouraging and will help you build positive momentum.
  • Debt avalanche: With the debt avalanche method, you make minimum payments on all your loans, but extra money will go toward the loan with the highest interest rate. Once that loan is paid off, you’ll put extra money toward the loan with the next highest interest rate. The debt avalanche method is a great way to save money because paying off your highest interest rate debt first lowers the total amount of interest you pay on your loans.

2. Instruct lenders on how you want your extra payment(s) applied

Now that you’ve decided on which loans to pay off first, you’ll need to let your lender or loan servicer know how you’d like your extra payments applied. Call or send in instructions that specify:

  • You want your payments to be applied to your minimum loan payments.
  • Extra money should be applied to the principal amount of either a) the smallest amount or b) the amount with the highest interest rate (depending on which payoff method you select).
  • That if you refinance, you’d like any payments from another lender to be applied the same way.

3. Follow up regarding whether your extra payment was applied correctly

Make sure to follow up to ensure your extra payment has been applied correctly. Depending on your lender, it may be as simple as checking online to see how the payment went through.

Refinancing student loans

Another option you could consider is refinancing your student loans to potentially secure a lower interest rate. A student loan refinance calculator can help calculate your potential new payments. If you’re planning on tackling your debt aggressively, you could also try modifying your repayment terms. If you shorten your loan terms and pay extra each month, you’ll be able to get out of debt sooner.

Is it worth it to make extra payments on your student loans?

Making extra payments on your student loans can help you save money, become debt-free sooner, and increase your chances of qualifying for a mortgage. But before you simply send off an extra payment, it’s important to make sure that you understand how payments are typically applied and what you need to do to ensure that your extra payments are applied correctly.

Save money overall

By paying extra, you can save overall on your payments. Eliminating your loans now means you can save on the interest you would otherwise owe.

Become debt-free early

You’ll be able to become debt-free sooner and put your money towards other life goals, such as a retirement fund.

Get closer to homeownership

Student loan debt can increase your debt-to-income ratio, which can have an impact on whether you’re able to qualify for a mortgage and what rate you’ll get offered. Becoming free of student loan debt will not only help improve this ratio, it will also allow you to save more money for a down payment. Learn more about getting a mortgage while you still have student debt here.

Making payments during the federal interest holiday

Note that through January 31, 2022, the interest rate on federal student loans is 0% and payments have been suspended. If you have the financial resources to do so, reducing your principal balance during this time will help save you money, since your interest rate will get calculated based on a smaller loan balance.

In providing this information, neither Laurel Road nor KeyBank nor its affiliates are acting as your agent or is offering any tax, financial, accounting, or legal advice.

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