Are Your Extra Student Loan Payments Being Applied Correctly? Follow These Steps to Make Sure You’re Maximizing Savings on Interest

You’ve finally started to make some extra money. Wisely, you decide to put it towards your student loan payments so you can get out of debt as soon as possible. Yet even with larger payments—far more than the minimum, it feels like your balance isn’t decreasing.

When you make large payments, lenders are required to first put your payment towards any outstanding fees, then interest, and then your principal. Not only that, but if you’re stuck with a bunch of loans, your payment could be spread thin and divided among all your loans.

That’s what happened to me when I started making payments over a thousand dollars. I was paying more than the minimum, but it hardly seemed to matter. A good chunk of it went to interest first, but then the rest was spread evenly among my loans. I knew if I really wanted to make progress and actually see it, I’d have to focus on specific loans.

If you want to jump-start your student loan repayment, here’s how you can make sure that your payments are applied properly so you can make the maximum impact on them.

1. Divide and conquer

The first step is to come up with a plan to help you divide and conquer. Start by creating two lists—one with your federal loans and one with your private loans. Then write down every single loan balance plus the interest rate under the corresponding column.

Then come up with a plan of attack. Will you use the ever-popular snowball method, which focuses on paying off the smallest balance first while paying the minimum on the rest? Or will you use the avalanche method to focus on high-interest debt first?

You can test the impact of both of these strategies using a student loan prepayment calculator like this one.

Given the amount of interest my graduate-school loans accrue each month, I use the avalanche method. Once you’ve come up with a strategy, focus on paying off your private loans first. Private loans often come with less protection and flexibility than federal loans, so it’s a good idea to pay them off first.

The divide-and-conquer strategy works because it lets you focus specifically on obliterating one loan at a time, rather than just making a dent on your total loan balance.

2. Talk to your lender

Every lender is different, but if you make a payment that is more than the minimum and you don’t specify where your money should go, your lender will decide how your student loan payment is divided up unless you specify otherwise.

To ensure that your extra payments are going directly to your principal—and to the loan you want them to, given your plan of attack—you need to talk to your lender and specify where your money should go.

The Consumer Financial Protection Bureau has created a sample letter to help you get started. You can use the following template to send a message to your lender via snail mail or email:

I am writing to provide you with instructions on how to apply payments when I send an amount greater than the minimum amount due. Please apply payments as follows:

After applying the minimum amount due for each loan, any additional amount should be applied to the loan that is accruing the highest interest rate.

If there are multiple loans with the same interest rate, please apply the additional amount to the loan with the lowest outstanding principal balance.

If any additional amount above the minimum amount due ends up paying off an individual loan, please then apply any remaining part of my payment to the loan with the next highest interest rate.

It is possible that I may find an option to refinance my loans to a lower rate with another lender. If this lender or any third party makes payments to my account on my behalf, you should use the instructions outlined above.

Retain these instructions. Please apply these instructions to all future overpayments. Please confirm that these payments will be processed as specified or please provide an explanation as to why you are unable to follow these instructions.

When you make extra student loan payments, it’s critical to remember that lenders are required to pay interest first, and that interest accrues daily. So if you pay an extra $250 to your loans, a full $250 will not be subtracted from them.

3. Confirm extra payments are applied correctly

Nelnet is my loan servicer, and I can easily choose which group of loans my payments go to. Using Nelnet, I can go to the site and click on an arrow to show all the details of every loan I have. I can then direct a payment towards the loan I want to pay.

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With Nelnet, you can view each of your loans individually and decide how to apply your extra payments by clicking this button.

Since I’m using the Avalanche method, I’m focusing on getting rid of that last 7.9 percent interest loan, so I direct extra money specifically to that loan. Keep in mind, interest is still growing on my other loans; I just choose to pay the minimum on those loans and focus the extra on one specific loan.

Because I’ve paid so much extra, you can see that Nelnet has moved up my due date to March 2016. While I could technically not pay anything until then, I have a plan to get rid of my student loans as quickly as possible, so I’m continuing to make monthly payments.

You can also choose “Do Not Advance the Due Date” if you’re paying double or more on your loans with Nelnet. If you feel like the advanced due date might throw you off your repayment plan, I recommend choosing this option so you’re reminded to continue with monthly payments.

Be aware that if you choose to pay extra on your loans, but then you stop making payments because of the advanced due date, you could be doing more harm than good. During that time you’ll still accrue interest.

For example, even though my due date is technically not until March 2016, if I neglected to make payments until then, I’d rack up at least $1,000 in interest. So don’t let the advanced due date confuse you or convince you to stop making payments.

For other lenders, be sure to check that your payments are being applied correctly. If it’s not clear on the website, use the above template to contact your lender immediately to make sure your extra payments are going towards the principal of your highest interest loan or lowest balance, depending on what method you choose.

If you send a check in the mail, be sure to include “Apply to Principal” on the memo line to ensure that you’re putting a dent in your loans.

If you’re like me and you want to get out of debt as soon as you can, making extra payments is the only way to go. But you want to make sure your extra money is hitting the principal and working in alignment with your strategy so you can actually see some progress.

The key is to talk to your lender and set up specific instructions for all your payments going forward.

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Published in Federal Student Loan Repayment, Federal Student Loans, Pay Off Student Loans, Private Student Loans, Smart Tips for Saving Money, Student Loan Repayment

  • Gregory Perez

    It’s actually ok to pay your loan ahead and advance the due date. You’ll still end up paying less interest in the end by paying more ahead of time even if you wait until the advanced due date to make your next payment. Yes interest accrues the entire time you’re waiting, but it would’ve accrued anyway even if you were making regular payments, except by paying ahead you’ve reduced the principal and thus the amount of interest that accrues each day. Mathematically you can’t do more harm than good by paying early. The only way that can back fire on you is if you put yourself in a position where you wish you had that cash available but instead put it towards your loan. Always advance the due date, it’s like a free option. You can always continue to make additional/regular payments however often as you please.

    • Hey Gregory,

      Thanks for your comment. That’s true. However, I’d look at it a little differently.

      If borrowers want to truly make a principal payment and get the most savings out of doing so, they should continue to make monthly payments even if they have advanced the due date.

      While I know that borrowers still have the option to make monthly payments, advancing the due date can confuse some borrowers who might not realize or consider that they can or should still make monthly payments even though their due date is months into the future.

      While it might be nice to have the option to skip a monthly payment after making an advanced payment, we generally don’t encourage borrowers to do this if they can afford to make their normal monthly payments. This is because continuing to make normal monthly payments will result in the greatest savings.

      Best,

      Jeffrey
      Student Loan Hero

  • M H E

    Thank you!! I never realized all my extra payments were only advancing my due date!

  • Katie

    Thanks for the advice! I have a student loan with 2 loan groups and the same interest rate. Can you explain why you would pay of the lower balance loan group first over the higher? I have received advice in the past to pay off the higher balance group first with the explanation that it is accruing more interest daily. I’m not sure this logic is sound. I would love more input on this! We just paid off my husband’s and now on to mine!

    • Hi Katie,

      Great question. When you have two loan groups with the same interest rate, we recommend paying the one with the lowest balance first. The reason for this is that you’re accruing the same amount of interest per dollar of principal regardless how large the principal in each loan group is. So it doesn’t matter which loan group you pay towards as it won’t save money. However, you will be able to simplify repayment a bit once your smaller loan group is paid off.

      Does this make sense? I hope this helps. Let us know if you have other questions.

      Best,

      Jeffrey
      Student Loan Hero

  • Melissa Castillo

    If i make an extra payment to a specific loan (when i have 6 with that lender) and it goes into pay ahead status, when i make my next monthly payment will they still disburse throughout all 6 loans or only the 5 that are due, since the other was technically paid early? Or only disburse a very small portion to the account that was paid ahead? What is their legal responsibility? These are federal loans.

    • Hi Melissa,

      That’s a great question. Unfortunately, I don’t know the answer to this. Technically lenders are supposed to apply extra payments to loans with higher interest rates first (saving you the most money). But I’m not sure how it works out in this particular scenario, and I’m not certain there’s any legal basis for how they’d handle this case.

      I’d recommend checking with your servicer to find out how they handle this situation as servicers often seem to handle payments differently.

      Let me know if you have any other questions!

      Best,

      Jeffrey
      Student Loan Hero

  • Megan Cords

    for Nelnet – they say you can direct the extra amount to the loan you want, but if you have any interest that’s where they will put your payment first. Did you find that they would put extra payment towards the principle even if there was still interest (as long as you were paying the minimum on interest obviously)?

    • Hi Megan,

      Excellent question. Typically the lender must apply payments towards interest accrued first before they can apply any part of your payment towards the principal balance. So if I’m understanding your question right, you can’t shift part of your payment to pay off principal until all the interest accrued is paid for that month.

      Does this answer your question? If not, let us know!

      Best,

      Jeffrey
      Student Loan Hero

  • Brandon

    Will those top 6 lenders allow you to refinance two separate groups of private loans? (Citi and Discover)

    • Hi Brandon,

      Yes, any of the lenders we work with allow borrowers to consolidate student loans from any source — Citi, Discover, federal, etc. The only requirement is that they are considered student loans.

      Hope this helps. Let me know if you have other questions.

      Best,

      Jeffrey
      Student Loan Hero

  • Libby

    I have subsidized and unsubsidized federal loans both at the same interest rate. I have had a number of deferments and my unsubsidized loan, which initially was a smaller amount, is now the larger loan due to compounded interest. Could you advise how to handle payments for unsubsidized vs. subsidized? It seems to me that this is more important than amount when determining which loan to pay off first if you anticipate that at some point in the future you may go back to school or get laid off from a job (I had deferments for both).

  • R

    I am so furious with Navient right now. I am at 6.75% and I just checked my statements and the money I sent them ONLY is going to interest.( I did not give them permission to take my loans in the first place.) Next, I don’t even have the option to put any money toward the principal. I am going to call them tomorrow to check on this and make them change this asap. Next, there isn’t even an EMAIL going directly to them! My choices right now are to call them, and they are not open on weekends, or to send them a letter. WTF?
    So, how do I go about changing my lender? I did have Nelnet back in 2006 and they were decent, but I NEED 2.1% or ANYTHING under 6%.
    How legit are the top 6 lenders? Where can I go to research them, because Navient really sucks.

  • Ann

    Hi, My son is in medical school and has had to take out loans. I want to help with a small amount every month (around $300) so he won’t be in so much debt when he is done with school. Is it best to pay off the interest every month or have the amount applied to the principle?

  • Hi Ann,

    That’s a great idea to keep his costs down!

    However, in your case, I don’t think it will matter how these payments are applied. Additionally, it’s likely the student loan servicer will want to apply this to new interest charges each month (and may even be required to).

    Since he’s deferring payments, any unpaid interest is going to be added to principal anyway while he remains in school. Your payments should at least keep some interest from being added to his balance each month.

    However, you likely want to direct payments towards the loans with the highest interest rates and also unsubsidized loans (where interest charges aren’t covered while in deferment).

    Lastly, it may be helpful to contact them and ask how they typically handle these payments.

    I hope this helps. Let me know if you have other questions.

    Best,

    Jeffrey

  • Hi Libby,

    Yes, you’re right. If you plan to defer payments again, it’s better to have the unsubsidized loans paid off as they will continue to accrue interest during deferment periods (while the subsidized ones done).

    Outside of this, we generally recommend paying off student loans with the highest interest rates first. This goes along with the Debt Snowball/Avalanche methods, which you can learn about here: https://studentloanhero.com/featured/debt-avalanche-vs-debt-snowball/

    Hope this helps. Let us know if you have other questions.

    Best,

    Jeffrey

  • Hi R,

    Sorry to hear about this. That sounds very frustrating.

    We recommend all of these lenders. You can read our reviews here: https://studentloanhero.com/student-loan-refinance-lenders/

    One thing to keep in mind is that lenders are required to apply payments to interest first before they apply it to principal. This is so your interest doesn’t capitalize.

    Hope this helps. Let us know if you have other questions.

    Best,

    Jeffrey

  • Jenn

    Hello. I am highly frustrated with my loans. Almost all, if not all of the money I pay every month is going just towards the interest, even when I pay overages. It seems that most of my overages have to be at least $300 over my minimum payment in order for even 50% of the money to get placed into my principal balance. How do they factor interest daily on the principal loan? I am not sure, but I would think the amount of interest owed every month would be approximately the same, which is not even close to the case when looking over my statements.

  • Hi Jenn,

    Here’s an article that may be helpful in explaining this: https://studentloanhero.com/featured/how-student-loan-interest-works/

    If you have other questions, let me know!

    Best,

    Jeffrey

    • Lisa

      The link you shared was no longer valid. Please let me know if you have another.

  • Chuck Behm

    My Student loans is just using my extra payments as paid ahead, its April and Im paid ahead until July I want my extra or over my over payments to be applied to the principal does the lender have to do this?

  • Heather Renee

    Are you able to refinance only some of your student loans if they are with the same servicer? For example, I have 4 different loans with Nelnet, but they’re all under the same account number but different groups. Can I choose to consolidate only some of them?

  • Hi Chuck,

    If you specify to the servicer that you’re making extra payments and wish to apply them to the principal, they should do this for you. The problem is that servicers have different processes for doing this (as explained in the article above).

    I’d get in touch with them and verify whether or not the payments have been or can be applied to principal rather than advancing your due dates.

    Hope this helps. If you have other questions, let me know!

    Best,

    Jeffrey

  • Hi Heather,

    Yes, you can refinance any individual student loans that you want. This assumes they they’re not already consolidated (which doesn’t sound like it’s the case).

    How it works is that after getting approval from the refinancing lender, the borrower sends a payoff statement and indicates which loans to include when refinancing.

    Hope this helps! If you have other questions, let me know.

    Best,

    Jeffrey

    • Lisa

      When you refinance loans, do they extend the life of the loan (as they do when you consolidate)? Also, how do you find the current interest rates for student loans? I had never thought about refinancing.

  • Josh

    So Nelnet just told me that they will always apply my money to the interest first, even when I pay over the minimum due. Any thoughts on this? Is there anything I can do to get them to put extra payments toward the principal if they say that they won’t?

  • H Josh,

    Lenders must generally apply payments to any outstanding interest first before they can apply any overpayment to principal. If you do not have any more outstanding interest, you can request extra payments be made towards principal.

    Does this make sense? If you have other questions, let me know.

    Best,

    Jeffrey

    • Troy

      Hi Jeffrey,

      Do you have any sources that show the math on how this principal and interest works? I always thought that if my minimum payment is, lets say $100 dollars, this will pay interest first then principle. But if I pay $200 then the extra $100 dollars will go directly towards principal. I don’t get why the extra $100 dollars goes towards the interest then the principal, am I understanding this correctly?

      Thanks,

    • Renee McClellan

      I don’t have 2 start paying my daughter’s Parent Plus loan until 2020. But I don’t want 2 wait until then 2 start paying. So what part should I start paying now. The interest or the principle?

  • Heather Williams

    Hi,
    I have consolidated my loans with Great Lakes. I am going to be paying extra each month. After I pay my normal payment, can I call and make the extra payment and ask that it be applied to principal only? I understand the interest requirement, but am wondering how extra payments work.

    • Hi Heather,

      Thanks for your question. In terms of saving money on interest, it’s likely in your best interest to have extra payments applied to principal. This will reduce the balance owed and thus the amount of interest you’ll accrue.

      I hope this helps. If there’s anything else I can do, let me know.

      Best,

      Jeffrey

  • feambrose

    Quick Question,
    I used Great Lakes and tried to ask them, but they sent me the general “How your payments are applied” info and that was of no help.
    If I do the divide and conquer a la Dave Ramsey’s Debt Snowball, and I pay off the smallest loan (for example, $800 unsub loan) while also making my minimum payment, will my monthly payment decrease?

    Any and all help is appreciated!

  • Britt

    Hi,
    I plan on paying off my private loans first, just as you have mentioned above. I am currently paying half of my monthly minimum balance biweekly. When is the best time to put an extra payment to the principle of those loans? Would it be the day after making the 2nd biweekly payment when your interest is the lowest? Any thoughts regarding this would be greatly appreciated. Thank you!

  • Patrick Hoog

    Question:
    I have three loans, all through Nelnet. The highest interest rate has the lowest balance. The middle rate has the middle balance. And the lowest rate has the highest balance. Therefore, the snowball and avalanche methods would be the same for me. Assuming prepaying through Nelnet as a lump sum acts the same as treating all three loans as if they were consolidated, is it better to prepay loans individually or better to make one large overpayment and have it applied to all?

    I tried to run my own calculations and found that it would take longer to pay them off individually rather than if they were one loan. I’m just not sure if that is right.

    • M W

      It is always better to pay off the highest interest loans, individually. Always. If your calculations tell you differently, then you made a mistake.

    • J McTygue

      Patrick, I think your calculation is a bit off. Applying the extra payment every month specifically to the highest interest rate loan you have left will pay off all your loans the fastest and save the most money. In the ‘avalanche’ approach, the highest interest loan is paid off completely before moving to the next highest interest rate. Depending on the loan amounts and interest, the avalanche approach may only save a few months and a few hundred $$ over the consolidated approach, but it would never result in more time and money.

      In you calculations, did you make sure to use a weighted average of the interest rates for the combined loan? For example, if you have 2 loans ($10,000 @ 4%, $6,000 @ 8%), the average interest rate on the total balance is 5.5%, not 6.0%

  • M W

    If you have the option, it is always better to apply payments to the principal rather than the interest. Principal always generates more interest. Interest does not generate more interest until it is capitalized (turning the interest into more principal). With loans like credit cards, interest capitalization happens every month. With student loans, it’s more complicated. The terms of your loan should explain what can trigger an interest capitalization in your specific case.

  • Lisa

    I have been on an Income Based Repayment plan for my student loans. Although payments are lowered monthly, I don’t ever make a dent in the principal. In fact, it DOES increase every month/year due to the low amount that I pay. I have contacted Sallie Mae (and now Navient) to discuss how out of control my balance will be after another twenty years. They just say to disregard the mounting debt and pay the lowered payment. So scary. Why isn’t there a cap on the amount due/interest if you qualify for lowered payments based on income?

  • Lisa

    Jenn, I am in exactly the same boat. Are you in an income based repayment?