What is student loan amortization?


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Amortization is the process of paying off a loan, such as a student loan, in equal installments. Although your payments for an amortized loan remain the same for the life of the loan, you will generally pay more interest than principal during the first years of your loan.

For this reason, you may not see much change in your overall student loan balance, especially if your payments are not enough to cover your monthly interest charges. The good news is that some repayment strategies might help you manage your student loans more easily while managing the impact of amortization.

Here’s what you need to know about student loan amortization:

What is amortization?

Amortization is the process used to pay off an installment loan. With an installment loan, you will make equal payments over a period of time.

The amount of your payments will go towards the principal and the interest will move throughout the life of the loan according to the amortization schedule.

Keep in mind: Unlike installment loans, revolving lines of credit, such as credit cards or lines of credit, are not paid on an amortization schedule. Instead, you can repeatedly draw down and repay your line of credit.

Are your student loans amortized?

Yes, student loans are a type of installment loan, which means they are amortized. Because of the amortization, you will likely start paying more interest when the repayment begins.

However, if your payments aren’t enough to fully cover your monthly interest, you could end up with skyrocketing interest charges. This is why many student borrowers have ended up with student loan balances that far exceed what they originally borrowed.

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If you’re wondering how competitive your loan is, the loan assessment tool below can help. Simply enter your APR, credit score, monthly payment, and remaining balance (estimates are good) to see how your loan stacks up.

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Learn more: Student Loan Interest Calculator: Estimate Payments

What is negative amortization?

Unlike mortgages and other amortized loans, federal student loan repayment options, such as income-contingent repayment (IDR) plans, could lower your monthly payments.

However, while 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 interest charges each month. Negative amortization occurs when your loan amount increases due to unpaid interest added to your principal balance.

Point: If your payments are too low to cover your interest costs, making extra payments on your student loans could 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 be sure to only pay what you can reasonably afford based on your budget. Also check with your loan officer before making any additional payments to ensure that the additional funds are applied to your interests.

To verify: Private Student Loan Repayment Options

Other methods of reimbursement and amortization

The higher your principal balance, the higher the percentage of your monthly payments that will go towards interest. And if you’re able to lower your monthly payments, the more likely you’ll end up with a negative amortization student loan and a higher principal balance.

If you’re struggling with negative amortization on your student loans, here are some options to consider:

  • Student loan refinancing: With refinancing, your old loans will be paid off with a new private student loan, leaving you with one loan and one payment to manage. Depending on your credit, refinancing a student loan might get you a lower interest rate, which would reduce the amount you owe in interest each month. It could also help you pay off your loans faster.
  • Federal Loan Forgiveness: Several loan forgiveness programs are available to federal student loan borrowers. For example, if you work for a government or non-profit organization and make qualifying payments for 10 years, you might be eligible for government loan forgiveness. Or if you enroll in an IDR plan, any remaining balance could be canceled after 20 or 25 years, depending on the plan.

Keep in mind: Although you can refinance federal and private loans, refinancing federal student loans will cost you access to federal benefits and protections, such as IDR plans and student loan forgiveness programs.

If you decide to refinance your student loans, be sure to consider as many lenders as possible to find the right loan for your needs. Credible makes it easy – you can compare your prequalified rates from multiple lenders in two minutes.

Find out if refinancing is right for you
  • Compare actual rates, not rough estimates – Unlock rates from multiple lenders in about 2 minutes
  • Will not affect credit rating – Checking rates on Credible will not impact your credit score
  • Data privacy – We do not sell your information, so you will not receive calls or emails from multiple lenders

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About the Author

Emily Guy Birken

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

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