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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.
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.
Find out your loan score
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.
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.
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.