A Look at the Fascinating Way Your Student Loan Payments Actually Work

pay student loans

Your first student loan payment marks the beginning of a journey toward debt freedom. If you want to get out from under those student loans sooner rather than later, it’s important to understand what, exactly, happens when you pay student loans and how each payment affects your balance.

Let’s dissect your student loan payments to get a better grasp on how they work.

When your first payment is due

For most federal student loans, your first payment is due six months after graduation. You don’t have to remember that exact date, however, as your lender is required by law to send you a payment schedule that clearly states when your first payment is due.

However, you do not have to wait until after that six-month grace period to make your first payment. If you have a job and income, you have the ability to start making payments any time. While in graduate school, I started paying off my loans the month they were issued because I was working during school.

Getting in the habit of making student loan payments early will help make the rest of the process much easier. Paying earlier also prevents interest from accruing and making your loan balances bigger.

How the money moves when you pay student loans

Most lenders let you pay using a paper check in the mail, online via the loan servicer’s website, or through your bank’s bill-pay feature. I typically used my bank’s bill-pay option because that was most convenient for me. Pick the option that is most similar to how you pay other bills and is easiest for you.

Both your bank bill-pay and the loan servicer website should allow you to set up automatic, recurring payments. Automatic payments help you avoid forgetting a payment, which can hurt your credit score, and in some cases, lead to a higher interest rate going forward. Never miss a student loan payment!

If you use an online payment option, the funds will be moved from your account of choice to the lender using the automated clearing house system, most commonly referred to as ACH. The term is used interchangeably with electronic funds transfer (ETF) in some cases.

If you are new to paying bills, as many new graduates are, here is how it works if you use your bank’s bill-pay:

  1. You enter the payment information into your bank’s website and schedule the payment.
  2. Your bank deducts the funds from your account and sends them electronically to the Federal Reserve Bank clearing house. When the funds are sent, an accompanying file encoded with your payment’s information goes along for the ride.
  3. The Federal Reserve receives the payment and looks at the attached file for the receiving bank’s routing number. If it is in the same region, the payment is quickly sent on to the receiving bank along with your account number. If it is in a different region, the Federal Reserve transfers it to that region’s Federal Reserve branch to then send on to your lender’s bank.
  4. The lender’s bank receives the funds with your lender’s account number and the associated payment information.
  5. The lender receives the funds and credits your account.

As you can see, there are a lot of steps involved to move the money across the country. The entire process typically takes two or three days from beginning to end, which is the case with almost all online payments that don’t involve a credit or debit card.

How the payment is applied

When the payment finally makes its way to the lender, it is applied to your loan balance. You will notice, however, that your loan balance doesn’t decrease by the exact payment amount. This is not a mistake – it’s happening because of the interest accrued on your loan through a process called amortization.

When you pay student loans, some complicated math is involved that you don’t have to worry about doing yourself (your loan servicer takes care of that for you). The student loan payment calculator below helps show how it works – click the expand link at the bottom to see the amortization details by year.

Student Loan Payment Calculator

Total interest paid

Monthly payment

Total amount paid

Total interest paid
Monthly payment
Total amount paid

Your monthly loan payment was calculated using your total loan balance, interest rate, and scheduled number of payments. If you make the minimum payment on time each month and never pay a cent more, your loan principal balance will reach zero with the last payment.

Your loan accrues interest based on the total current balance. Because the balance is highest in the beginning, your first payment will mostly go towards paying off interest, with the remainder lowering the principal. Note that any extra funds added to your payment can go straight to the principal (be sure to tell your servicer that’s what you want), which is why extra payments can make such a big difference in how quickly you pay off your debt.

Each month, the amount going towards interest gets a little smaller and the amount going towards principal gets a little bigger until the loan is completely paid off.

Start with habits to pay your loan off early!

No one likes making student loan payments (except maybe the very last one), but as a new graduate with a loan, that is something you have to deal with. If you want to pay as little as possible over the life of your loans and get out of debt as soon as possible, you should get in the habit of paying extra each month.

I paid at least double my minimum payment each month, as well as added in any bonuses from work and tax refunds to help pay it off even faster. I paid off my loans two years after graduation. Think you can beat me? Consider this a challenge!

pay student loans

Check out the early payoff calculator to see what you should pay each month to get out of debt in two years, five years, or whatever plan works best for your budget.

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