When you start repaying a student loan, it’s a bit of a buzzkill to see a large chunk of money come out of your bank account. Month after month, you kiss that $350 goodbye (or whatever your regular payment is), trying not to think about everything else you could’ve used it for. Eventually, you get used to it, for the decade or more you make that same payment.
At least, that’s how it works if you enter a standard repayment plan on a fixed-rate student loan, like most borrowers do. It’s monotonous but predictable: Keep making that $350 payment on time, and after 10 years (or whatever the repayment term is), you’ll be out of student loan debt.
You can speed it up, if you want, and if you can afford to. Paying more than your minimum student loan payment can be a good financial move, but there are a few things you need to know before you decide to do it.
Consider the Benefits
First, the perks: If you pay extra on your student loans each month, you can get out of debt faster, save money in the long run, give yourself a little budget flexibility and improve your credit. Here’s a quick explanation of each of those advantages.
Get out of debt faster: This one’s pretty self-explanatory. The more you pay in addition to your minimum student loan payment, the faster you’ll drive down your outstanding student loan balance. You can use a student loan payoff calculator (there are all sorts of them online) to help you figure out how much to pay to get out of debt by a certain date.
Save money: The faster you pay off your student loan debt, the less time it has to accrue additional interest. So if you have multiple student loans at different interest rates and saving money is a high priority for you, you may want to focus on paying more on the high-interest loans first.
Flexibility: Say you have a 10-year repayment term, but you want to get out of debt in five years. You can calculate what your loan payment would be for a five-year repayment term, and plan to pay that much each month. But if you run into financial difficulty at any point in your loan repayment, remember that your required loan payment will be less than you’ve actually been paying. You can go back to paying the minimum, which allows you to use that money you’d been putting toward paying off your loan faster toward another financial obligation, all while keeping your student loan in good standing.
Improve credit: One of the most important aspects of your credit score is the amount of debt you have, and while that’s mostly determined by your use of revolving credit, installment loans like student loans also have an effect. Credit scoring models look at how much money you’ve borrowed and how much of it you’ve repaid — the more of your debt you’ve repaid, the better. Paying down your debt faster also improves your debt-to-income ratio, which isn’t part of your credit scores but is often factored into loan decisions, like a mortgage application.
Do the Math
If you’re lucky enough to be in a position where you can afford to pay more than you need to on your student loans, make sure you’re doing what’s best for you financially. This requires a little math. Ask yourself, Is the money I’ll save in interest on my student loan greater than the return I’ll get by putting more into my 401K? If not, maybe you want to put that extra money toward saving for retirement, rather than attacking your student loan debt.
Numbers aren’t always the answer. Sure, you might make more money by investing your extra resources, but some people just want to get out of debt as fast as they can, no matter what. That’s fine, too. It’s a personal decision, but it’s important to make that decision after considering all your options. Above all, make sure you can really afford to put extra money toward your student loans, because dedicating financial resources to student loan payments while you’re going into credit card debt for everyday purchases doesn’t make a lot of sense.
Pay Attention to the Details
If you’re planning to do something different with your student loan repayment, communicate with your student loan servicer. Make sure any extra payments go toward the principal balance by making your desire known to the servicer in advance of payment and check your account after it’s gone through. These things get messed up all the time, so if you want to do it right, you need to put in a little extra work.
It’s also important to keep an eye on your credit standing, in addition to your student loan statements every month, to make sure everything is going as planned. You can keep tabs on your credit by getting a free credit report summary, updated every two weeks, on Credit.com.