Study loan

Fit the Pieces of the Student Loan Payment Puzzle Together

You make your student loan payments every month, for years. Yet when you look at your balance, it doesn’t seem like it has decreased at all.

In fact, it seems to keep going up. Many factors determine how much your student loan

payment actually cuts into your debt. Knowing the following five things about how payments

are applied is the only way you can ensure your repayment strategy is as effective as it can be.

How often interest accrues on your loans: Here’s the bad news: Interest accrues every single day that most federal student loans are outstanding.

Subsidized Stafford and Perkins loans generally do not accrue interest during in-school, grace and deferment periods. However, some newer Stafford loans will accrue interest during their grace period.

Borrowers who took their first loan on or after July 1, 2013 run the risk of losing their subsidy if they take a long time to complete their credential.

The good news is that like most consumer debts, interest only accrues on the outstanding balance. So the more quickly you pay it off, the less you pay in interest over the life of the loan.

That also means that the majority of your monthly payment goes toward interest in the first few years of repayment.

When your interest is capitalized: Interest on student loans is capitalized – meaning it's added to the principal balance – at various times.

While the rules differ slightly depending on when you took your loan out and what type of loan it is, expect outstanding interest to capitalize any time your loan goes from a nonrepayment status, such as grace or deferment, to a repayment status.

You always have the option to pay that interest before it capitalizes, which is a must if you want to avoid having interest charged off of interest.

How loan holders apply your payments: The government regulates the way loan holders apply your payments.

When loan holders receive your payment, they must credit your funds in the following order: first, they pay any fees associated with the loan, such as late fees; second, they apply funds to the interest that has accrued to date; third, any remaining funds go toward the principal of the loan.

Here’s a quick example to illustrate how this works.

Say you have a $1,000 loan at 5 percent interest placed on a standard 10-year term, with payments made approximately every 30 days.

What happens if you pay extra: Federal regulations require a loan holder to push the next payment due date up for every multiple of the monthly payment they receive.

So, if your payment of $50 is due in October and you send them $100, your next payment isn’t going to be due until December.

Keeping track of your own payments: If you want to see how much of your payments go to your principal, most loan servicers allow you to log on and view a breakdown of your payment history, which includes how the payments were applied to principal and interest.

If not, you can ask for one to be sent to you.

Regardless, if you overpay your loan to decrease your principal balance, you need to provide that specific instruction to your Study loan holder. If you pay online, see if there’s a note section or a special option for including this information. If you pay with a check, include instructions with the check and then verify online that the payment was posted correctly.

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