Paying Extra on College Debt Has Wallop
One-third of 18-24 year olds in a new Allstate poll said the best use of their extra funds is getting their college or other debts off their backs. For those considering making larger payments, a loan amortization table demonstrates the impact.
Paying down debt is just another form of saving, and larger loan payments significantly shorten the time it takes to pay it off, while reducing the total interest paid. Start with the $5,000 loan example already loaded into a Bankrate.com student loan amortization calculator:
- Paying $96.66 per month on a $5,000 student loan with 6 percent interest eliminates it in five years. An extra $50 every month – a couple of nights out – knocks two years off the payment time. This can be seen by entering $50 in the top box under the “Extra payments” heading in the calculator and clicking “Show/Calculate Amortization Table.”
- The stakes are higher – and the rewards greater – for bigger loans. It takes $333 per month to pay off a $30,000 debt in 10 years, but an extra $50 a month eliminates it in eight years. Another advantage of paying the loan down faster is less interest – about $2,000 less by paying it off in eight years.
It’s okay to carry some debt from college, which is an investment in one’s future earning power. But as young adults enter the work world and start receiving a steady paycheck, they will have to work through competing financial priorities.
There are many legitimate uses for extra money, including paying more on the mortgage each month, building up an emergency fund, or investing in a 401(k) retirement plan at work – or chopping down the student loans.
This calculator helps with the decision.
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As one of my colleagues points out, one nice thing about paying student loans is that the interest is often deductible. That’s also part of the decision.
Here’s an IRS link to information about qualifying interest deductions:
http://www.irs.gov/publications/p970/ch04.html
Kim (blog writer)
I have a student loan serviced through Navient (before that it was with Sallie Mae). They seem to intentionally structure the online repayment to discourage adding a small amount on top of the required monthly payment. If I were to simply add $50, for example, to my online monthly payment, the extra money does not reduce principal, but simply pre-pays part of the next month’s payment. There is no way in the online payment interface to make that $50 go to principal. Navient states that one can do this by sending a check and a separate piece of paper indicating how to allocate the extra.
For online payment the only way to get an option to pay on principal is to make more than a double payment. For example, if my monthly loan payment is $300, I can receive the option of applying extra $ to principal if I were to pay, say $620. Only then am I presented with a choice to apply funds to principal *or* to pre-pay future regular payments.
I think that this set-up for online (where I would guess most of the world pays their student loans) makes it less likely that a person will have sufficient extra funds to even be able elect to make extra payments on principal.
I am interested in hearing others’ thoughts and whether this is a common method that others have encountered. Thanks again for the useful information in the article.
Steve
I can attest that paying extra makes a huge difference. I paid off my loan in one year instead of 10 and I saved about $8,000 in interest that way. I did this by saving some of my income during university to apply as a lump sum at the end, and making a budget that allowed me to devote 38% of my net pay towards my loans. One year of frugality paid off in spades.
Steve,
I also noticed that I used to be able to just change my monthly Navient payment (I pay about 50% over the monthly amount right now) to add more money when, eg, I got a raise, but now, I have to ask them – there’s a form and everything – to pay MORE than the required amount. So I set a reminder to myself and I just pay more in another payment every month. I am going to check now to see if I can send it to principal. I seem to recall some legislation about that years ago.