Why You Should Make More Than Minimum Student Loan Payments – Forbes Advisor – Earn Charter

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When paying off student loans, making the minimum payment is all that’s required to keep your loans current. Yet, adding extra money to the minimum each month could pay down your balance faster and save you a bundle in interest. If you’re trying to get rid of debt as soon as possible, increasing your payment is one of the best ways to make it happen.

What Is the Minimum Student Loan Payment?

The minimum payment on student loans is the least possible amount you can pay monthly to keep your loans in good standing. You can find your minimum payment amount and due date in your student loan account or your student loan billing statement.

Each month, your minimum payment is divided up to pay interest and principal according to the loan’s amortization schedule. Loan amortization is a timeline that breaks down how each payment applies to interest and principal until the installment loan is repaid.

What Happens If You Pay Less Than the Minimum on Student Loans?

If you make a partial payment, the unpaid amount is considered late and you could be charged late fees. Other penalties you might face for paying less than the minimum due depends on your loan type and how late your payment is.

Federal Loans

Any unpaid balance on federal loans is considered delinquent right away, but it’s not reported to the three credit bureaus—Experian, Equifax and TransUnion—until you’re 90 days late.

Federal loans enter default status when a balance is 270 or more days past due. If you default on your federal loans you’ll no longer qualify for additional financial aid and lose eligibility for forbearance, deferment and income-driven repayment (IDR) plans.

The government can also garnish your wages or take money from your tax returns and Social Security benefits to pay off the balance.

Note: Late, partial or missed payments won’t be reported to the credit bureaus or result in loan default from now until September 30, 2024 during the federal loan on-ramp period. During this period, penalties for paying late are removed temporarily to help borrowers get acclimated to repayments.

Private Student Loans

Late private student loan payments can be reported to the credit bureaus within 30 days and may go into default as soon as 90 days. Private student loan lenders can also sue you for unpaid debt.

How To Calculate Minimum Payments on Student Loans

Whether you want to estimate payments for a new loan or determine minimum payments for an existing loan, follow these steps to calculate what you might owe each month.

  1. Find your loan terms. To determine a loan’s minimum payment, you need to know loan details like your loan balance, interest rate and repayment term length. You can find this information on your loan promissory note, by logging in to your student loan account or contacting your loan servicer to retrieve loan details.
  2. Use a student loan calculator. Once you have your loan terms, input the details into the fields of a student loan calculator to estimate your monthly payments. Certain calculators also let you input additional payments to see how paying extra might save you on interest and shorten your repayment term.
  3. Use the student loan simulator. Federal student loans have many different repayment plans, including some that set payments based on your income or gradually increase your payment over time. Using the loan simulator on StudentAid.gov is the best way to compare minimum payment amounts under a customized repayment plan.

Why You Should Pay More Than the Minimum Payment

Making just the minimum payment on student loans can keep you in debt for longer, especially if your federal loans are on an IDR plan. If payments on IDR plans aren’t enough to cover interest, the unpaid interest can accrue and increase your balance.

Paying more than the minimum helps reduce debt faster while saving you money on interest. For example, if you had $50,000 in student loan debt with a 10-year term and a 6% rate, adding an extra $100 to your monthly payment could save you $3,479 and shave off nearly two years from the repayment term.

The potential for interest savings is even greater for higher debt balances. For example, adding $200 to the minimum payment for an $80,000 loan with a 15-year term and a 6% interest rate could save you over $14,000 over the loan term.

Moreover, private and federal student loans usually have no prepayment penalties, so you can pay off your debt early without consequence.

Is It Better To Pay Off Student Loans Early?

Paying off student loans early is ideal because it removes a financial responsibility from your monthly budget.

Having less debt can free up cash for you to save, invest or contribute to other interests. Plus, getting rid of debt can decrease your debt-to-income (DTI) ratio, making it easier to qualify for a mortgage if homeownership is part of your life plan.

That said, when money is tight, finding extra cash for debt is easier said than done. Even if you don’t have a large sum to spare, paying a little extra here and there can put small dents in the balance and the sum of that effort can add up to major progress.

Paying more than the minimum on student loans isn’t required. But, allocating spare money, bonuses, tax refunds and other cash windfalls to additional monthly payments could get you out of debt faster. Using a student loan calculator can help you map out how much time and interest you might save by paying more.

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