Are You Applying Extra Student Loan Payments Correctly? Follow These Steps to Make Sure

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You’ve finally started to make some extra money. Wisely, you decide to put it toward 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.

That’s because when you make large payments, lenders are required to put your payment toward any outstanding fees first, 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 and its interest rate under the corresponding column.

Come up with a plan of attack. Will you use the ever-popular debt snowball method? This 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? Given the amount of interest my graduate school loans accrued each month, I used the avalanche method.

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

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 in your total loan balance.

2. Talk to your lender

Every lender is different, but if you make a payment that’s more than the minimum without specifying where your money should go, your lender will decide how it’s divided.

To ensure your extra payments are going directly to your principal — and to the loan you want — you need to talk to your lender.

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 on your loans, the full $250 might not be subtracted from the balance.

3. Confirm extra payments are applied correctly

Nelnet was my loan servicer, and I could easily choose which group of loans my payments went to. Using Nelnet, I could go to the site and click an arrow to show all the details of every loan I had. I could then direct a payment toward the loan I wanted to pay.

Nelnet loan repayment

Image credit: Nelnet

Since I was using the avalanche method, I focused on getting rid of my highest interest loan first; it had an interest rate of 7.90%. I directed extra money to that loan. Interest was still growing on my other loans; I just chose to pay the minimum on those loans and focus extra payments on one specific loan.

Because I paid so much extra, you can see that Nelnet moved my due date to March 2016, which at the time was about eight months down the road. While I could have technically not paid anything until then, I planned to get rid of my student loans as quickly as possible, so I continued 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 but then 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 bill due date was March 2016, if I neglected to make payments until then, I would have racked up at least $1,000 in interest from the time I made this extra payment until that date. 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 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 toward the principal of your highest interest loan or lowest balance, depending on what repayment method you choose.

Also, 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.

What about refinancing?

You’ll notice in the sample letter to the lender above that there’s a paragraph about refinancing. How exactly does refinancing help you to pay your loans?

You might want to consider refinancing your student loans if you can get a lower interest rate with a different lender, that way you’d be spending less money overall and could potentially get out of debt faster. To get started with refinancing, you’ll first want to compare refinancing lenders to find loan terms that work for you. Be sure to weigh the pros and cons before you refinance, especially if you’re considering refinancing federal student loans.

Make sure you’re paying the principal

If you’re like me and you want to get out of debt as soon as you can, making extra payments is one way to go. But if you use this method, 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.

Interested in refinancing student loans?

Here are the top 6 lenders of 2018!
LenderVariable APREligible Degrees 
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Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Laurel Road.

Laurel Road Disclosures

  1. VARIABLE APR – APR is subject to increase after consummation. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes.

2 Important Disclosures for SoFi.

SoFi Disclosures

  1. Student Loan RefinanceFixed rates from 3.999% APR to 7.804% APR (with AutoPay). Variable rates from 2.480% APR to 7.524% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.480% APR assumes current 1 month LIBOR rate of 2.07% plus 0.91% margin minus 0.25% ACH discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score. Soft credit inquiries allow SoFi to show you what rates and terms SoFi can offer you up front. After seeing your rates, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit inquiry. Hard credit inquiries (or hard credit pulls) are required for SoFi to be able to issue you a loan. In addition to requiring your explicit permission, these credit pulls may impact your credit score
  2. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)

3 Important Disclosures for CommonBond.

CommonBond Disclosures

  1. Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). The following table displays the estimated monthly payment, total interest, and Annual Percentage Rates (APR) for a $10,000 loan. The Annual Percentage Rate (APR) shown for each in-school loan product reflects the accruing interest, the effect of one-time capitalization of interest at the end of a deferment period, a 2% origination fee, and the applicable Repayment Plan. All loans are eligible for a 0.25% reduction in interest rate by agreeing to automatic payment withdrawals once in repayment, which is reflected in the interest rates and APRs displayed. Variable rates may increase after consummation. All variable rates are based on a 1-month LIBOR assumption of 2.08% effective July 25, 2018.

4 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Education Refinance Loan Rate DisclosureVariable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of August 1, 2018, the one-month LIBOR rate is 2.07%. Variable interest rates range from 2.72%-8.17% (2.72%-8.17% APR) and will fluctuate over the term of the borrower’s loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a cosigner. Fixed interest rates range from 3.50%-8.69% (3.50% – 8.69% APR) based on applicable terms, level of degree earned and presence of a cosigner. Lowest rates shown require application with a cosigner, are for eligible, creditworthy applicants with a graduate level degree, require a 5-year repayment term and include our Loyalty discount and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty and Automatic Payment Discount disclosures. The maximum variable rate on the Education Refinance Loan is the greater of 21.00% or Prime Rate plus 9.00%. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change. Please note: Due to federal regulations, Citizens Bank is required to provide every potential borrower with disclosure information before they apply for a private student loan. The borrower will be presented with an Application Disclosure and an Approval Disclosure within the application process before they accept the terms and conditions of their loan.
  2. Federal Loan vs. Private Loan Benefits: Some federal student loans include unique benefits that the borrower may not receive with a private student loan, some of which we do not offer with the Education Refinance Loan. Borrowers should carefully review their current benefits, especially if they work in public service, are in the military, are currently on or considering income based repayment options or are concerned about a steady source of future income and would want to lower their payments at some time in the future. When the borrower refinances, they waive any current and potential future benefits of their federal loans and replace those with the benefits of the Education Refinance Loan. For more information about federal student loan benefits and federal loan consolidation, visit http://studentaid.ed.gov/. We also have several resources available to help the borrower make a decision at http://www.citizensbank.com/EdRefinance, including Should I Refinance My Student Loans? and our FAQs. Should I Refinance My Student Loans? includes a comparison of federal and private student loan benefits that we encourage the borrower to review.
  3. Citizens Bank Education Refinance Loan Eligibility: Eligible applicants may not be currently enrolled, must be in repayment of their existing student loan(s) and must make the minimum number of payments after leaving school. Primary borrowers must be a U.S. citizen, permanent resident or resident alien with a valid U.S. Social Security Number residing in the United States. Resident aliens must apply with a co-signer who is a U.S. citizen or permanent resident. The co-signer (if applicable) must be a U.S. citizen or permanent resident with a valid U.S. Social Security Number residing in the United States. For applicants who have not attained the age of majority in their state of residence, a co-signer will be required. Citizens Bank reserves the right to modify eligibility criteria at anytime. Interest rate ranges subject to change. Education Refinance Loans are subject to credit qualification, completion of a loan application/consumer credit agreement, verification of application information, certification of borrower’s student loan amount(s) and highest degree earned.
  4. Loyalty Discount Disclosure: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower or their co-signer (if applicable) has a qualifying account in existence with us at the time the borrower and their co-signer (if applicable) have submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, or other student loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI, and VT and some products may have an associated cost. This discount will be reflected in the interest rate disclosed in the Loan Approval Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  5. Automatic Payment Discount Disclosure: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
  6. Co-signer Release: Borrowers may apply for co-signer release after making 36 consecutive on-time payments of principal and interest. For the purpose of the application for co-signer release, on-time payments are defined as payments received within 15 days of the due date. Interest only payments do not qualify. The borrower must meet certain credit and eligibility guidelines when applying for the co-signer release. Borrowers must complete an application for release and provide income verification documents as part of the review. Borrowers who use deferment or forbearance will need to make 36 consecutive on-time payments after reentering repayment to qualify for release. The borrower applying for co-signer release must be a U.S. citizen or permanent resident. If an application for co-signer release is denied, the borrower may not reapply for co-signer release until at least one year from the date the application for co-signer release was received. Terms and conditions apply.
  7. Average savings based on 18,113 actual customers who refinanced their federal and private student loans through our Education Refinance Loan between January 1, 2017 and December 31, 2017. The calculation is derived by averaging the monthly savings of Education Refinance Loan customers whose payments decreased after refinancing, which is calculated by taking the monthly student loan payments prior to refinancing minus the monthly student loan payments after refinancing. The borrower’s savings might vary based on the interest rates, balances and remaining repayment term of the loans they are seeking to refinance. The borrower’s overall repayment amount may be higher than the loans they are refinancing even if their monthly payments are lower.
2.57% – 5.87%Undergrad
& Graduate
Visit Earnest
2.80% – 6.38%1Undergrad
& Graduate
Visit Laurel Road
2.48% – 7.52%2Undergrad
& Graduate
Visit SoFi
2.47% – 7.99%Undergrad
& Graduate
Visit Lendkey
2.57% – 6.65%3Undergrad
& Graduate
Visit CommonBond
2.72% – 8.17%4Undergrad
& Graduate
Visit Citizens
Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.