Student loan amortization: What you need to know

Understanding amortization is critical whether you already have a student loan, or are just thinking about getting one. Amortization can significantly impact the amount you repay on your loans.

What is amortization?

Amortization is when you pay off a loan over time with regular, equal payments. The most common example is a car or house payment where you borrow once, and then make the same payment every month for a fixed period of time. That period of time could be four or five years for a car payment, or thirty years for a home mortgage. Part of the loan payment goes towards the interest, and the other part repays the principal.

How is your student loan affected by amortization?

Even though your student loan payment is the same each month, the amount of your payment allocated to principal and interest actually changes over the life of the loan.

Generally, more of your monthly payment goes toward interest during the early years of repayment. This means that you could be paying hundreds every month, but only see your principal balance decrease by a small amount.

Negative amortization—and why you should avoid it

Negative amortization happens when the monthly payment you make on your student loan doesn’t cover all of the interest due. When interest makes up the majority of your payment—like at the onset of the loan—this can drastically affect the total amount you will owe. If you don’t make the full payment, the difference is added to the total amount owed, meaning the total loan amount will increase by the amount of unpaid interest you have.

Tips for paying off your student loan faster:

  1. Pay early and often. At a minimum, pay off the interest that accrues while you are in school and during the grace period that follows graduation. Although interest-only payments are not as beneficial as full payments of principal and interest, interest-only payments are a better option than outright deferral.
     
  2. Direct any extra income or windfalls to the loan with the highest interest rate.
     
  3. Provide clear instructions to your lender that any extra payments are to be applied to the principal of the loan you designate. If your lender doesn’t receive any instructions from you, they may allocate your excess payments to other loans or future payments.
     
  4. Refinance at a lower interest rate so that more of your payment goes towards your principal.
     
  5. If you can’t afford full payments, make partial monthly payments during the in-school deferment to save money over the life of the loan.
     

First Tech has plenty of resources to help you understand your loan and choose the best terms to fit your life. When you’re ready, get started with us today or speak to one of our Student Loan Specialists.