Understanding the Elements of Your Student Loan Payment | Store student loan

You pay off your student loan every month for years. Yet when you look at your balance, it doesn’t look like it’s gone down at all. In fact, it seems to continue to increase.

Many factors determine how much paying off your student loan actually reduces your debt. Knowing the following five things about how payments are applied is the only way to ensure your repayment strategy is as effective as possible.

1. How often interest accrues on your loans: Here’s the bad news: Interest accrues every day that most federal student loans go unpaid. Subsidized Stafford and Perkins loans generally bear no interest during tuition, grace and deferment periods. However, some new Stafford loans will accrue interest during their grace period. Borrowers who took out their first loan on or after July 1, 2013 run the risk of losing their grant if they take a long time to get their title.

The good news is that, like most consumer debt, interest only accrues on the outstanding balance. So the faster you repay, the less interest you pay over the life of the loan. It also means that the majority of your monthly payment is spent on interest in the first few years of repayment.

2. When your interest is capitalized: Interest on student loans is capitalized – that is, it is added to the principal balance – at various times. Although the rules differ slightly depending on when you took out your loan and the type of loan, expect unpaid interest to be capitalized each time your loan goes from non-repayment status, such as a grace period or postponement, to a refund status.

You always have the option of paying this interest before it is capitalized, which is essential if you want to avoid interest being charged on the interest.

3. How Loan Holders Apply Your Payments: The government regulates how 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 interest accrued to date; third, all remaining funds are allocated to the principal of the loan.

Here’s a quick example to illustrate how it works. Say you have a $1,000 loan at 5% interest for a standard term of 10 years, with payments made approximately every 30 days.

On day one, you have $1,000 in principal and $0.14 in interest. Second day $1000 interest and $0.28 interest and so on until day 30 when you have $1000 principal and $4.20 interest. On the 30th day, the loan holder receives your $50 payment. You don’t owe any late fees, so they pay accrued interest first and the remaining $45.80 goes to principal.

So now your principal is $954.20 with $0 interest. This means that the principal balance is lower, so you will only accrue about $0.13 in interest per day in the future.

4. What happens if you pay extra: Federal regulations require a loan holder to extend the next payment due date for each multiple of the monthly payment they receive. So if your $50 payment is due in October and you send them $100, your next payment won’t be due until December.

You can submit or call instructions so that the payment due date is not extended, but this will not change how funds are actually credited to your account. It only really makes a difference if you pay with automatic electronic payments, because if you pay in advance, the loan holder will not make any payments for the following month.

Remember, you can’t prepay interest that hasn’t accrued yet, so if you pay extra each month, the amount of money paid in principal will be the same even if the lender pushes back. your due date.

5. Track your own payments: If you want to see how much of your payments are going to your principal, most loan servicers allow you to log in and view a breakdown of your payment history, which includes how payments were applied to principal and interests. If not, you can request that one be sent to you.

Either way, if you overpay your loan to reduce your principal balance, you must provide this specific instruction to your loan holder. If you are paying online, see if there is a note section or special option to include this information. If paying by check, attach the instructions to the check, then verify online that the payment was recorded correctly.

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