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The Sneaky Student Loan Mistake You Don’t Want to Make

When payments go toward late fees and accrued interest first, you aren’t making progress in paying down your principal.

June 21, 2021

You are on top of things.

You know exactly how much you owe in student loans, and you have a plan for paying down that debt. Even better — you are going to pay your student loans off ahead of schedule. 

As good as these intentions are, you might accidentally be committing one of the most frustrating student loan mistakes when making extra payments. 

If your extra payments are going towards fees or accrued interest, you could be missing out on the advantages that come with getting ahead on student loan payments. 

Let’s take a closer look at this college student loan problem and how you can avoid it. 

The Problem

It’s not a bad idea to make extra loan payments — it’s actually a really good thing to do. Where the student loan repayment problem lies is in how your lenders handle those additional payments. 

Many lenders will apply any extra student loan payments to late fees first. Then they move on to your accrued interest. The lender will tackle both of those before they apply a penny to your principal. This is where things can get problematic. 

When payments go toward late fees and accrued interest first, you aren’t making progress in paying down your principal. The principal is the amount you originally borrowed and paying it down is important because it’s the amount on which interest charges are based. The faster you pay down your principal, the less interest you’ll pay. Confirming that your extra payments are actually going towards your principal can help you avoid one of the biggest student loan repayment mistakes that borrowers make.

On top of saving money on interest, making principal-only payments can also help you improve your credit score, which can make obtaining other forms of credit easier. Directing extra payments towards whichever loan has the highest interest rate can maximize your repayment strategy and save you money in the long run.

Making extra payments is worth it, even if you can only allocate a little extra cash each month towards your principal. Doing so can lessen how much interest you need to pay, which will reduce how much you spend repaying your loan. 

The Fix

There are a few ways to get around this pesky student loan mistake and confirm that your extra payments are really working hard for you. Get ready to have a talk with your lender.

1. Making extra payments right after your normal monthly payment 

In the days following your regularly scheduled monthly payment, you have $0 in accrued interest on your loan. If you make an extra payment right after your scheduled one, that additional payment should go towards your principal, but, be sure to confirm that fact with your lender in advance. 

2. Instructing your lender on how to manage extra payments

Telling your student loan lender to apply your additional payments towards reducing your principal balance is an easy way to make sure your extra payments are going where you want them to. 

Many lenders automatically apply these payments to your lowest-interest loan, so if you have multiple loans with the lender, specify that you want the payment to apply to your highest-interest loan.

If you’re making your payments online, you may have the option to choose how to apply the money. If you’re paying by check or through auto-debit, you may need to give clear instructions to the lender on how you want your payments applied. 

Not sure how to make this request? The Consumer Financial Protection Bureau created a handy letter. Keeping a copy of the letter submitted to the lender in your records and having them confirm receipt of your instructions can ensure the payment is applied correctly. 

3. Checking how much you owe on your next payment

If you’re not entirely sure how your lender has been applying your extra payments, double-check how much you owe for your upcoming payment. If they’ve pushed your due date or you owe less than usual, that means your lender is using extra payments to advance your due date. If they do this and you don’t keep paying your typical amount each month, you won’t save any money as your principal balance will still be accruing interest in between your payments. 

4. Keeping a close eye on your lender

Sadly, even if you tell your student loan lender how you want your extra payments applied, it’s not uncommon for student loan issues to arise. You may want to confirm with them every time you make an extra payment to make sure they’re following your instructions. 

Consider reviewing your monthly statement carefully every single month. Suppose you transfer your loan from one student loan servicer to another (like refinancing or consolidating). In that case, your instructions on how to handle extra payments may not apply to your new loan, so you’ll want to instruct the new lender accordingly. 

Stay on Top of Your Student Loans

Life happens, and it can be easy to forget to make your loan payments on time. One of the biggest mistakes with student loan repayments you can make is to miss a student loan payment. 

Signing up for autopay means you’ll never miss a payment. Many lenders even offer an interest rate deduction to borrowers who enroll in their autopay program. Making payments on time can also boost your credit score.

Extra payments on your student loans can be a great way to get debt-free fast. Making sure that cash goes the extra mile and applying it to principal payments could get you out of student loans even faster.  

Want to free up room in your budget so you can make even more student loan payments? Tally can help you pay down your credit card debt faster so you can make progress on other financial goals!