Student Loan Amortization Explained: How to Pay Off Your Debt Faster


Student loans can be intimidating.

There are so many technical terms you need to learn in order to maximize your repayment strategy. Terms like IBR, REPAYE, above-the-line deduction, and amortization.

Let’s tackle that last, shall we? Exactly what is student loan amortization and how does it affect your monthly payments?

What Is Amortization?

To understand amortization, let’s start with a brief overview of loans.

There are two types: the first is a revolving loan, like a credit card. With a revolving loan, you have a line of credit for a particular amount (let’s say $1,000) that you can borrow from again and again. Your monthly payment depends on how much of that amount you’ve currently borrowed. As long as you don’t exceed the limit and make at least the monthly payment, you can borrow the same money many times.

The second type of loan is an installment loan, which includes mortgages, auto loans, and student loans. This is a loan you borrow once, then gradually pay back over time. Generally, these loans have a fixed monthly payment — part of that payment goes to principal and a certain amount to interest.

Amortization refers to the process of paying back an installment loan on a fixed payment schedule. Unlike a revolving loan, you can’t “re-borrow” money you’ve paid back, but your monthly payment amount under an installment loan won’t fluctuate the way it can under a revolving loan, either.

How Amortization Affects Your Monthly Student Loan Payment

Perhaps counterintuitively, even though your payment under a typical installment loan is the same each month, the amount of your monthly payment allocated to principal and interest changes over the life of the loan.

Almost always, more of your monthly payment goes toward interest during the early years of repayment. Below is a table of my own student loan payments from 2013. Notice how almost all of my payment goes toward interest until I started paying extra in August:

Payment Date Minimum Payment Actual Payment Principal Paydown Interest Charged
1/28/2013 $221.30 $221.30 $18.43 $202.87
2/28/2013 $221.30 $221.30 $0.00 $221.30
3/28/2013 $221.30 $221.30 $15.25 $206.05
4/28/2013 $221.30 $221.30 $0.00 $221.30
5/28/2013 $221.30 $221.30 $0.89 $220.41
6/28/2013 $221.30 $221.30 $0.00 $221.30
7/28/2013 $221.30 $221.30 $0.88 $220.42
8/28/2013 $221.30 $353.80 $129.33 $224.47
9/28/2013 $221.30 $353.80 $129.82 $223.98
10/28/2013 $221.30 $353.80 $137.53 $216.27
11/28/2013 $221.30 $353.80 $130.84 $222.96
12/28/2013 $221.30 $367.71 $152.43 $215.28
Year 2013 $2,655.60 $3,332.01 $715.40 $2,616.61


You can see that despite paying over $3,300 toward that loan over the course of the year, I only reduced my balance by about $700 — and that’s only because I started making extra payments.

Since the balance on that loan was over $55,000, that was pretty tough to swallow. So if you just started making student loan payments, you could be paying hundreds of dollars a month only to see your balance decrease by a fraction of that amount. Frustrating! #AmortizationInAction

Amortization and Income-Driven Repayment

Under certain repayment plans, especially income-driven plans like IBR, PAYE, and REPAYE, your monthly payment isn’t fixed — it varies according to your income.

However, the amount of interest you’re being charged doesn’t vary. This can lead to a situation where your monthly payment not only doesn’t pay off any principal at all, it doesn’t even cover the interest due! This is called negative amortization.

Watching your balance grow because of negative amortization can be disheartening, but worth it in the long run if you’re holding out for loan forgiveness. Just remember that if you leave an income-driven plan, your interest may be capitalized (added to your principal balance). When that happens, you are paying interest on your interest. No good.

Fortunately, you can make extra payments even if you are on an income-driven plan, which helps avoid negative amortization.

Additionally, if you’re on an income-driven repayment plan, the government will pay the remaining unpaid accrued interest on your subsidized loans, including the subsidized portion of a consolidation loan, for up to three consecutive years after you begin repayment under IBR or PAYE. The new REPAYE plan will also have a similar benefit.

How to Get the Best of Student Loan Amortization

Amortization can’t be avoided entirely, since it’s how all installment loans work. However, if you are strategic about your repayment plan, you can maximize the amount that is going toward principal and start to make a bigger dent in your balance.

Whether you are dealing with negative amortization or regular, run-of-the-mill amortization, the best way to reduce the amount of interest you are being charged is to pay extra towards your student loans — as much as you can, as often as you can.

Here are some things to keep in mind when making extra payments:

1. Make extra payments according to the “debt avalanche” method.

Under this method, you pay the minimum on all balances except the one with the highest interest rate. Any money you have leftover in your budget for extra payments, as well as any windfalls, should be directed to that highest-interest balance.

Because your extra payments will be directed toward principal, and because the amount of interest you are charged is based on your principal balance, the debt avalanche method is the best method for reducing the amount of interest you pay over the lifetime of the loan.

Check out this prepayment calculator to see the impact it could have on your loans.

2. Make it explicit that extra payments are to be applied towards the principal of the loan you designate.

Sometimes loan servicers will apply extra payments toward the next month’s payment (read: next month’s interest) instead of toward principal. Additionally, if you have multiple loans with one servicer, they may also apply the extra payment to a loan of their choosing rather than the one you’re targeting.

Include a note in the appropriate field of your online payment or physical check, then double-check that your payment was applied as directed and contact your servicer for a correction if necessary.

3. Refinance at a lower interest rate.

The lower your interest rate, the more of your monthly payment goes toward principal, and the faster you pay back your loans — even during months when you can’t make extra payments for one reason or another.

Be careful when refinancing ; if you currently have federal loans, for example, you could be giving up benefits like access to deferment, forbearance, or income-driven repayment options if you refinance with a private lender. However, with refinancing lenders offering rates as low as 1.9% as today, the money you save could be used to help you get out of debt faster.

Amortization isn’t your friend, but it can be conquered!

While there’s nothing fun about seeing part of your hard-earned student loan payments going toward interest, understanding the process can make it less scary. And once you’re operating from a place of logic rather than fear, you’re in a better position to strategize the best way to put amortization — and student loan debt as a whole — behind you, once and for all.

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