What is Student Loan Amortization?

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Amortization is the process of paying back a loan – such as a student loan – in equal installments. While your payments on an amortized loan remain the same throughout the life of the loan, you typically pay more interest than principal during the first few years of your loan.

Because of this, you may not see much change in your overall student loan balance at first, especially if your payments aren’t enough to cover your monthly interest costs. The good news is that some withdrawal strategies could help you manage your student loans more easily while also managing the impact of amortization.

Here’s what you should know about paying off student loans:

What is amortization?

Amortization is the process by which an installment loan is repaid. With an installment loan, you pay equal installments over a certain period of time.

How much of your payments goes toward principal and interest changes over the life of the loan according to the amortization schedule.

Keep in mind: Unlike installment loans, revolving lines of credit — like credit cards or lines of credit — aren’t paid off on an amortization schedule. Instead, you can use and pay off your credit line over and over again.

Are your student loans amortized?

Yes, student loans are a type of installment loan, which means they are amortized. Because of the amortization, you are likely to pay more interest in the early stages of repayment.

However, if your payments aren’t enough to fully cover your monthly interest, you could end up with skyrocketing interest costs. Because of this, many student loan borrowers have found themselves with student loan balances that far exceed what they originally borrowed.

Find out your credit score

If you’re wondering how competitive your credit is, the following credit score tool can help. Just enter your APR, credit score, monthly payment and remaining balance (estimates are fine) to see how your loan is performing.

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Learn more: Student Loan Interest Calculator: Expected Payments

What is negative amortization?

Unlike mortgages and other amortized loans, federal student loan repayment options such as B. Income-Related Repayment (IDR) Plans, reduce your monthly payments.

Although signing up for one of these plans can make your payments more affordable, it could also result in negative amortization if your payments don’t fully cover your monthly interest costs. Negative amortization is when your loan amount actually increases because unpaid interest is added to your principal balance.

Tip: If your payments are too low to cover your interest costs, making additional payments on your student loans can help you avoid negative amortization. For example, if your monthly payments are $350 but your monthly interest is $400, paying the $400 will prevent $50 of unpaid interest from being added to your balance.

Just make sure you only pay for what you can afford according to your budget. Also, check with your credit servicer before making any additional payments to ensure the additional funds are used towards your interest.

Cash register: Personal student loan repayment options

Other repayment methods and amortization

The larger your principal balance, the larger the percentage of your monthly payments that goes toward interest. And if you’re able to reduce your monthly payments, the more likely you are to end up with a negatively amortizing student loan and a higher principal balance.

If you’re struggling with negative amortization on your student loans, there are a few options to consider:

  • Student loan refinancing: Refinancing uses a new personal student loan to pay off your old loans, leaving you with just one loan and one payment to manage. Depending on your credit rating, you might get a lower interest rate when refinancing a student loan, which would reduce the amount you owe in interest each month. This could potentially help you pay off your loans faster as well.
  • Federal Loan Writ: Several loan forgiveness programs are available to federal student loan borrowers. For example, if you work for a government or nonprofit organization and make qualifying payments for 10 years, you may qualify for a public service loan forgiveness. Or if you sign up for an IDR plan, you can have the remaining balance waived after 20 or 25 years, depending on the plan.

Keep in mind: While you can refinance both federal and private loans, refinancing federal student loans costs you access to federal benefits and protections — like IDR plans and student loan forgiveness programs.

If you decide to refinance your student loan, you should consider as many lenders as possible to find the right loan for your needs. Credible makes this easy – you can compare your pre-qualified interest rates from multiple lenders in two minutes.

Find out if refinancing is right for you
  • Compare actual prices, not rough estimates – Unlock rates from multiple lenders in about 2 minutes
  • Does not affect credit score – Checking prices on Credible will not affect your credit score
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About the author

Emily Guy Birches

Emily Guy Birken is a credible authority on student loans and personal finance. Her work has been featured online by Forbes, Kiplinger’s, Huffington Post, MSN Money and The Washington Post.

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