Can You Make Principal-Only Payments on Student Loans?

When you make minimum monthly payments on your student loans, a portion goes toward the interest on the loan, and a portion goes toward the principal balance, or the original loan amount. 

You can apply extra payments toward the principal, lowering your overall interest costs. However, making this type of payment might require additional steps beyond just sending your lender extra money. Here’s what to know about making principal-only payments and how to ensure they have the desired impact.

Can you make principal-only payments on student loans?

Yes, you can make principal-only payments on private and federal student loans. Under federal law, lenders can’t charge you a prepayment fee for paying your loan off early. As a result, you can make extra payments without worrying about paying a fee.

That said, some lenders have special rules for extra payments. Earnest, for example, says on its website: “Since all payments received on your loan will be applied to interest first, then to principal, we’re unable to offer a principal-only payment option.”

However, the lender also states on its website that you can send in an extra payment on your due date, and most or all of it will go toward your principal.

All the other lenders we researched allow student loan borrowers to make principal-only payments without specific restrictions.

Benefits of principal-only payments

Lenders based student loan interest payments on your original balance. The lower your principal balance, the less interest a lender will charge you. As a result, making principal-only payments can lead to huge savings over time.

For example, if you have a $20,000, 10-year student loan at 6.8% and made the minimum monthly payment of $230, you’d pay $7,619 in interest over the life of the loan. However, if you paid an extra $50 a month—$280—you’d save $1,911 in interest and pay off your loan four years ahead of schedule.

Ask the expert

Michael Menninger

CFP®

Making extra payments on a student loan doesn’t lower your future payments.  However, if you applied that extra payment to a revolving credit card, it can lower future minimum payments and pay off higher-interest debt.  The borrower should always maintain an emergency reserve to avoid finding themselves in a pinch if they need money.

How to make principal-only payments on student loans

The process varies depending on your loan servicer, but here are the typical steps to make a principal-only payment on your student loans.

1. Log in to your loan servicer’s website.  Some lenders allow you to select principal-only as a payment method.
2. Contact your lender. If your lender doesn’t offer that option, contact them directly and they should be able to apply your extra payment toward the principal.
3. Review your statements to make sure the payment was applied correctly. After you’ve made the payment, login to your account again to review your monthly statements to see if your extra payment was applied toward the principal. Contact your loan servicer to see what went wrong if it was applied to the principal and interest.

Tip

You typically make a one-time principal-only payment. However, rules vary by lender. For example, Ernest recommends that its borrowers increase their monthly autopay amount if they want more of their payment to reduce the principal balance.

Alternative strategies to pay off your student loans faster 

Making principal-only payments isn’t the only way to pay off your student loans faster and lower your total borrowing costs. Here are some other student loan repayment methods to consider.

Refinancing 

One popular strategy for paying off student loans ahead of schedule is student loan refinancing.

When you refinance your student loans, you switch them out with a new private student loan. If you qualify for a lower rate than the average current rate on your existing loans, you can save thousands of dollars in interest. You could also refinance to a shorter term to pay down your loans quicker.

However, if you have federal student loans, consider the pros and cons of refinancing them. While you can save money, the trade-off is that you’ll lose access to benefits, including student loan forgiveness and income-driven repayment plans.

Bi-weekly payments 

Another way to pay off your student loans faster is to make bi-weekly payments. To do this, split your payment in half and make two payments before your due date. Making bi-weekly payments leads to making one full extra payment each year.

Debt avalanche method 

If you have multiple student loans, the debt avalanche method could help you save the most on interest. This method involves focusing on putting any extra funds toward paying down your student loan with the highest rate first while making minimum payments on your other loans.

Ask the expert

Michael Menninger

CFP®

The debt avalanche method works for all types of debt, including credit cards. However, sometimes it may be better for the borrower to pay off a lower balance, even if the rate may be a little lower. By doing so, it eliminates one of the debts and lowers the monthly minimum which may help cash flow or even lower DTI if seeking other loans.