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:
- You enter the payment information into your bank’s website and schedule the payment.
- 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.
- 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.
- The lender’s bank receives the funds with your lender’s account number and the associated payment information.
- 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
Total amount paid
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|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!
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.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Variable APR||Eligible Degrees|
|Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 6.97% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.30% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. 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. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate|
|2.47% – 6.30%1||Undergrad & Graduate|
|2.51% – 8.09%4||Undergrad & Graduate|
|3.02% – 6.44%2||Undergrad & Graduate|
|2.69% – 7.21%5||Undergrad & Graduate|
|2.79% – 8.39%6||Undergrad & Graduate|