What Is It and Why Care?
The principal balance on your student loan is the original amount you take out. This will be the amount of debt you owe when you take out a student loan and what you want to make payments towards.
Given that the amount of interest you pay is based on your principal, you want to pay attention to your principal balance and pay it down when you can. Making this a consistent priority will allow you to pay off your student loan faster.
If you have federal loans, your payments are currently paused through December 31, 2022, and any payments you do make will not have interest on top of it. Right now is a great time to pay down your principal balance.
How Interest Affects Your Balance
Interest is the percentage that the servicer charges for borrowing the principal amount. The federal government student loans’ interest rates are fixed for each student. The rates will not change during the life of the loan. However, private loans may vary in interest from person to person.
When making a monthly payment on your student loan, you are first paying off the amount of monthly interest you have accrued. The remaining money included in your payment goes towards paying off the balance you currently have. This is the principal payment. When it is time for the next month’s student loan payment, the interest you accumulated will be based off the outstanding debt or outstanding principal balance.
Does Unsubsidized vs Subsidized Matter?
The short answer, is yes. The type of loan you take out will directly affect your principal balance. When you sign up through FAFSA you will have the option to take out either subsidized or unsubsidized loans.
- Direct subsidized loans from the Department of Education do not start accruing interest until six months after you graduate college or leave school. The amount they offer you is based on your financial need. However, direct unsubsidized loans work a bit differently.
- Unsubsidized loans begin accruing interest right after you borrow the money. You have the option of starting to pay it off right away or defer any payments until you graduate.
Whichever route you choose, your student loan will begin to accrue interest. This amount is then added to your principal balance. When you graduate, you will be paying interest on the interest you accumulated during college.
How To Best Tackle Your Principal Balance
Before you accept the money and definitely before it starts to accrue interest, know what your principal balance is and keep an eye on your outstanding principal balance as you pay off your student loans. Making extra payments helps reduce your principal and accelerates your ability to pay off your student loan balance.
With the current 0% interest rate on federal loans, now is a great time to start paying off your principal student loan balance! Chipper Round-Ups and Chipper Rewards are smart, easy ways to make to pay down your student loan principal faster.