Reducing The Principal Of Your Student Loans
Updated on April 17, 2019
Reducing The Principal Of Your Student Loans
When it comes to student loan debt, interest is your worst nightmare. Accruing on a daily basis, interest can cause your loan balance to grow at an accelerated rate. Generally, this is the main reason why student loans take so long to pay off! One way to slow your student loan growth is by reducing the principal of your student loans.
When you reduce the principal of your loans, you lower the amount of debt that is gaining interest. This can save you a good amount of money over time by allowing you to get rid of your student loan debt faster.
Let’s get whyze and learn about a few simple strategies that will help you lower the principal of your student loans and save you money.
Paying More Than The Minimum
One of the easiest ways to reduce the principal of your student loans is to pay more than the minimum! Paying just the minimum keeps you in student loan debt longer and costs you more in interest over time.
If you have the ability to, add extra money to your student loan payments. Even if it’s only $20, any payment over the minimum will save you money long term.
As an example, if you have $40,000 in student loan debt at an interest rate of 5%, your minimum payments will be $424.26 if you want to pay off your loans in 10 years. Paying just the minimum will cost you a total of $10,911.45 in interest. If you decide to add an extra $20 to your monthly payment, you will end up paying off your student loans six months faster and saving almost $700 in interest.
While this might not seem like a lot, let’s look at what happens if you added an extra $100 to your monthly payment instead. Paying an extra $100 a month would allow you to pay off your student loans more than 2 years faster and would save you over $2,500 in interest . Now that’s some serious cash!
No matter what extra-payment amount you decide on, you will want to make sure this overpayment actually goes to the principal of your student loans and not interest. To make sure this happens, you’ll need to instruct your lender to do so. Typically, student loan lenders will allow you to do this online, but if not, give your lender a call.
More Frequent Payments
If you don’t have the funds to pay more than the minimum on your student loans, you can still reduce your principal. Making more frequent payments on your student loans will help you reduce your principal and save you money without requiring you to add more cash to your payment.
While the standard is to make monthly student loan payments, dividing this payment in half and making a payment every two weeks can really make a difference.
As an example, a $35,000 student loan with an interest rate of 5% would require a monthly payment of $371.23 to pay off in 10 years. If you instead split this payment into two bi-weekly payments, you would pay your loans off one year faster and save over $1,000 in interest.
This strategy works by minimizing the principal amount of your student loans that is accruing interest daily. Instead of waiting a month to reduce your principal, this strategy allows you to reduce it every two weeks.
Another way to reduce the principal of your student loans is to make lump-sum payments when you can. If you happen to suddenly get a chunk of money, put some or all of it towards the principal of your student loans. Getting money from things like tax returns and gifts are perfect opportunities to reduce your principal and pay off your student loans faster.
Making Interest Payments During Deferment Or Forbearance
The final strategy is for those who have student loans in deferment or forbearance. Since student loans may still accrue interest during either, you’ll want to pay this interest as it accrues if you have the cash to do so.
With all interest accrued on your student loans during deferment or forbearance being added to the principal of your loans once these periods are over, paying down the interest as it accrues will keep your loan balance from ballooning.
While these strategies are great ways to pay off your student loans faster and save money, you’ll want to make sure you’ve paid off debts with higher interest rates before using them. These debts typically include things like credit cards and personal loans.
Since these will cost you more over time, you’ll want to make sure to get rid of these before using these strategies to reduce the principal of your student loans.
Once you’re ready to focus on erasing your student loans, put one or all of these strategies to work. Your future self will thank you!