Student Loan Overpayment: A Little Extra Can Go A Long Way

Learn more about how overpayments on your student loans work. Includes information on when it can be done, why people decide to overpay, how to make overpayments and what you can do instead. Also learn about how you can pay your loans faster, smarter and how you can protect your money.

Updated by B Harshitha on 21st January 2020

If you start to make some extra money and you have a bunch of student loans yet to be repaid that burgeoning on a daily basis, it is only natural that you would want to cater to repaying them first. Who would not like the idea of getting relieved of their student loans a little earlier than stipulated? And to a layman it makes perfect sense. You would pay a little more to watch the remainder of your student loan decrease. This could also mean lowered interests and faster relief from the burden of having to pay your loans. Bear in mind that, depending on whether your have a private student loan or a federal student loan, overpayment may be dealt with differently. It is very important to have a good understanding of student loans before anything else, including making decisions about overpayments. 

But surprisingly, contrary to what would be expected, for a lot of people who make extra payments towards their student loans, this does not happen. More often than not, overpayment of student loans ends up causing more harm than good. 

There are quite a few reasons for this, which we will see. 

Repaying student loans can be done in numerous ways. Each come with their own procedures for overpayments. Explore more to find out if overpaying on your student loan would be a good idea for you. Now, let’s break down how overpayments work and what could be some scenarios where it makes sense.

TABLE OF CONTENTS:

What should you do instead of overpaying your student loans?

For those of you with Income-Driven plans:

The slow progress that accompanies student loan repayment with an Income-Driven plan such as IBR, PAYE or RePAYE could make anyone feel like not a substantial amount is being paid off. You may think that your loans are growing at a constant rate. It is also likely that you may not have a lot of extra money to even afford overpayment, which is actually a blessing disguise, as we will see later in this piece. It is important to remember that the remainder of your student loans will be forgiven after your repayment term. 

Instead of devoting the little extra cash that you may have to the repayment of your student loans, which would technically be overpayment, you could invest the little that you get in better places. You could invest this money for your retirement or put this into an emergency fund. As such, it doesn't make sense to make extra payments.

For Borrowers Going For Public Service Loan Forgiveness:

It is important for people planning on applying for Public Service Loan Forgiveness(PSLF) to be aware of the fact that overpayments towards your student loan can cause the amount of forgiveness that you can avail to decrease.

You could also find yourself in “Pay Ahead Status”. Here, any overpayment on your student loan will cause your next payment to be lowered, which ultimately will not help you qualify for PSLF or a lot of other forgiveness plans

For Borrowers With A Little Extra Each Month:

Even if you find yourself with a little extra money often, it is not advisable to overpay your student loans. You might want to do the following instead:

  • Think first about saving this extra money for yourself. Some accounts like a 401k, 403b or HSA help lower your taxable income, which can ultimately lower your income-driven repayment plan payment amount. 

  • It makes a lot more sense to clear your other debts before making payments towards your student loans using extra money. These debts could include credit card debts or private student loans. Plan to tackle other debts that are not as flexible as your federal student loans with repayment options.

  • Make sure you have a decent emergency fund in place. Take care of other expenses that you’ve been likely been putting off. A good emergency fund is one that looks promising for the next3 to 6 months.


When does overpayment make sense?

If you find yourself in any of the following situations, you might consider overpayment on your student loans in order to pay off faster. The following apply if you are free from other types of debt like credit card debt and have an emergency fund set up. Also note that we assume that you are taking advantage of your employer’s 401k.

  • If you are on a Standard 10 Year repayment plan and can not qualify for a student loan forgiveness program, then you are likely to benefit from making extra payments on your student loan. If you can afford to make more overpayments, more than the minimum payments, you will be better off.

  • Private student loans do not come with a lot of options and aren’t very flexible. Refinancing can help you get better interest rates and lower the amount of interest that you’ll pay. But ultimately, if you can afford to pay a little extra, you might as well.


What should you do if you wish to make overpayments on your student loan?

  • Divide and conquer: Make a list with all your student loan balances and their respective interest rates. You might want to separate federal and private student loans. You could come up with a plan where you use a certain method to overpay on your student loans. The two most popular methods are the “snowball” and the “avalanche”.In the snowball method, you will pay the student loan with the smallest balance while and pay the minimum amount on the others. In the avalanche method, you will focus more on the high-interest debt first. Decide based on the amount of interest that your student loans accrue/have accrued.You could use a prepayment calculator to check which one will be more effective. This strategy works well because you focus on one student loan at a time.

  • Talk to your student loan lender: Lenders usually decide where extra payments on your student loans go. To avoid any ambiguity and to ensure that whatever overpayments you make contribute to paying off the principal of whichever loan you prefer, have a discussion with your student loan lender. Before you make any overpayments, bear in mind that your lenders are required to make payments towards the interest first, which accrues on a daily basis. So any payment that you may make is not likely to make your balance disappear.

  • Ensure that the extra payments are applied appropriately: Make sure you are very clear about which loan you would like to make a payment towards. Now as per the pan that you have concocted, make payments towards appropriate loans, depending on the method that you have adopted to pay off your loans. Depending on your lender, overpayments can cause your due dates to get pushed. This often doesn’t mean that you can relax. This is because interest on your student loans will continue to accrue. Talk about whether the overpayments are going towards the principal of your student loans. If you’re like the majority and wish to get out of debt faster, making extra payments is one way to go about it. But it is your responsibility to ensure that your extra money is covering the principal and working in compliance with your strategy. This will help you see some progress.


Difference between overpayments and prepayments on your student loans

Most student loan servicers have a “Quick Pay” option that lets borrowers to send payments without asking them to set aside overpayments. It is important to read and understand the terms and conditions pertaining to how payments get allocated before opting for “Quick Pay”.

Under this option, any overpayment will only push your due date by the number of payments that your payment covers unless you specify to the servicers otherwise. This means that any overpayments that you make will not contribute to the repayment of your principal, but will instead only cause your due date to get pushed.


Pay off your student loans faster, smarter

As already mentioned, take care of credit card and other debts before focusing your attention to your student loans. That is mainly because these debts usually charge more in interest.

Since student loans and college debts do not have a prepayment penalty attached, you can make overpayments on your student loans if you wish to. The following are some ways how you can make overpayments on your student loans in a smart way:

  • Start by paying off your capitalized interest: If you are reveling in your grace period, that is, the 6 months after you leave school or graduate, you might want to start by paying off your accrued interest. This will keep your balance from growing and you will find it easier to pay it off fast.

  • You may make extra/overpayments: Autopay will automatically deduct the required amount to be paid directly from your bank account. It can also help lower your interest rate. Some lenders will permit you to pay an extra amount towards a student loan of your preference.

  • Biweekly payments: Biweekly payments can be made manually online.

  • Look to your employer: As part of workplace benefits, some employers offer to pay off your student loans. Check with your HR about your eligibility and enrol accordingly.

  • Refinance your student loans: Refinancing your student loans can help reduce the duration of your repayment term. You could qualify for a lower interest rate through a private lender if you have good credit and stable income. You may pay extra with a term that is not standard and pay off your loans faster.

    Refinancing, in particular, is a very sought after method that can make your life easier by helping you manage numerous bulky student loans. It comes with a bunch of benefits such as lowered interest rates and smaller monthly payments depending on the plan that you choose and your credit score.


Why do some people repay their student loans early?

Given how anxious about finishing their education and alleviating the burden of their student loans student are, it should come as no surprise that a lot of kids start repaying their loans way ahead of when they are supposed to. With the Pay As You Earn(PAYE) system your student loans are paid back from your wages, along with tax and national insurance, if your earning is above a certain threshold.

The following are some reasons why you may start repaying your student loan early, the main ones are:

  • Mistakes in filling the important forms, specifically the student loan section where you give wrong details about say, when you finished your education.

  • Mistakes on the part of your employer could cause you to start repaying your student loans earlier than when you are supposed to. Always take care while filling out important forms pertaining to student loans. Check to ensure that no deductions are being made towards your student loans from your income before the stipulated payment time.

  • People who earn more than the student loan repayment threshold are more likely to make payments earlier than the rest.


Protect your money

There is no doubt that you will pay off your student loans on time and on schedule if you pay exactly the estimated monthly payment amount. Ensure that you do the following if you are looking to make some extra payments towards your student loans in an effort to pay them off faster:

  • Always check to make sure you are on track to meet your goals: You can access your student loan servicer’s website to get details of your account’s payment history and your monthly statements. You can always talk to your lender about making extra payments or ask them to increase the amount that you are required to pay on a monthly basis. 

  • Talk about what you would like to be done with the extra money to your student loan servicer: Explicitly stating what you would like to devote the extra money to can save you a lot of time and effort. It helps avoid confusions and ambiguities. You can either set up a standing instruction with your lender on your account and what the extra money would go to. An example could be that you wish to pay some extra money towards a specific student loan with the highest interest rate. This can help you save a lot of money and also help you pay your loans back faster. To establish prepayment preferences, contact your student loan servicer’s customer service department. You can also discuss about customizing your automatic payments. You might also want to avoid falling into a “Pay Ahead Status”, where extra payments cause your due date to get advanced, but do not actually help you pay your loans any faster. It may even end up costing you more in the long run.

  • If you face any issues, ask for help: Contact your servicer if something doesn’t look right to you in terms of your payment amounts or your schedule. If you face any unethical issues with your lender, then file a complaint.


Should you choose to make overpayments on your student loan?

It is the general idea that it is not worth it to make overpayments on your student loan. Most people would advise you to channel any extra money that you have towards other investments or payments over paying extra on your student loan. This is mainly because any extra payments made will be made to cover any outstanding fees first, then your interest and finally your principal. If you have multiple loans, your payment can be divided among them. 

But, it need not necessarily be harmful for you to overpay on your student loans. Before making any extra payments, it is crucial for you to have a word with your student loan servicer about what this extra payment will be directed to cover. It is not desirable for your interests to get paid off and not your principal. This will neither reduce your repayment term nor your interest amounts. Talk about this explicitly with your servicer. Also, make sure that you do not fall into a “Pay Ahead Status” as already mentioned. Learn more about how student loan servicers operate to find out how they work with repayments and overpayments.