With the right strategy, nearly anyone can repay their student loans early All it takes is some diligence and planning to reach that particular goal. The issue that often happens is that people don’t understand how a lender applies their payment to loans. Once you do know, you’ll be able to use prepayment to free up your finances a little at a time.
The Concept of Prepayment
When a lender receives a loan payment, they first need to reduce the collection costs, late charges, and interest. From there, they’ll reduce the outstanding loan principal. Even when you think you’re paying the value of your payment for that month, there is a chance that you’re not actually hitting the principal. It poses a problem because the principal is responsible for the effect of all the other fees, especially interest.
When you’re prepaying, you are paying extra to ensure that you reduce the outstanding principal. By doing that, you reduce the interest paid over the loan's lifetime, effectively making it cheaper. It is a strategy that will save you more money in the long run.
If you’re dealing with multiple loans, the best approach is to tackle the highest interest rate loan first. Use your money to reduce its principal so that you get to save more.
Applying for Prepayment
To apply for prepayment, you first need to inform your lender of the plan. Otherwise, they may only think that the extra payment will be for the next cycle. If you don’t tell them, it is the same as paying the intended amount each month.
The prepayment method only works best for standard loans. If you are under a repayment plan, you may want to reconsider as their interest rates often fluctuate depending on your contributions.
If you’re dealing with multiple loans, you need to inform the lender about which one you’ll be prioritizing. If you don’t tell them, they might equally distribute the payment among all your loans.
Approaching a Prepayment Strategy
One of the best ways to make sure you are always prepaying is to create a habit around it. Here are some of the ways you can effectively tackle your outstanding principal:
- Set an alternative date for prepayment: Having another payment date ensures that you are setting aside money.
- Set a budget: Knowing where your money goes beforehand will prevent you from spending it on other things.
- Check employer benefits: Some employers offer to match repayment or add to what you’re giving. It depends on what policies they have.
- Begin paying while in school: Some students take part-time jobs to begin hitting their principal as early as possible. It can be very effective for subsidized loans as your payments will directly impact them.
By applying any or all of these strategies, you can begin prepaying, which sets the stage for an early fulfillment. You free your finances and then work towards your other goals.