Although college is a common pathway for students, it’s expensive. In the 2023-2024 school year, the average cost of tuition and fees was $10,662 for in-state students at public schools, $23,630 for out-of-state students at public schools, and $42,162 at private colleges. Not to mention expenses like housing, food, books, and other supplies.
With such a steep cost, it’s no surprise that students usually graduate from college with student loan debt. Thanks to interest, you’ll also likely end up repaying much more than you initially borrowed, depending on how long repayment takes.
When dealing with student loans, it’s important to understand how student loan interest rates affect your repayment and how your extra payments are applied to your debt.
How Student Loan Interest Rates Affect Your Loan Balance
Student loan interest rates can cause your loan balance to grow over time. The higher the rate, the more interest that accrues.
For example, if you took out $30,000 in student loans and qualified for a 10-year loan at 6.5% interest, you’d pay $10,877 in interest charges on top of the $30,000 you borrowed.
But if you qualified for a $30,000 loan at 7.5% interest — a difference of just 1% — you’d pay $12,732 in interest charges. The extra percentage point would cause you to pay nearly $2,000 more in interest charges.
However, you can cut down on interest payments by paying off your debt ahead of schedule. When you pay off your loans early, less interest accrues over your loan’s life, allowing you to save money.
The Difference Between Principal and Interest Payments
When you enter into repayment, your loan payments cover two different aspects:
- Interest: Interest that has accrued to date
- Principal: The original loan amount
When you make a payment, lenders typically apply the payment to any fees first, such as late fees or returned payment fees, then to interest charges. If any money is left over, they will apply the excess to the principal balance.
Student Loan Repayment Examples from ELFI
If you take out private student loans from ELFI, you can choose from the following repayment options:
- Immediate: You make payments toward the principal and interest right after disbursement
- Good for: You’re working while in school and can afford the payments. You want to pay the least amount of interest possible.
- Interest Only: While you’re in school, you make payments that only cover the interest that accrues on the loan.
- Good for: You can’t afford to make full payments, but you want to minimize interest charges. You’re working part-time or have some income while in school.
- Fixed: With partial payments, you make a flat-rate payment — typically $25 — while you’re in school.
- Good for: Money is tight while you’re in school, but you want to chip away at some of the interest that accrues.
- Deferred: If you opt for fully deferred repayment, you don’t make any payments at all while you’re in school. This is the most expensive repayment option, as more interest accrues over the life of the loan.
- Good for: You are in a rigorous academic program and need to completely focus on your studies, so you don’t want to make any payments while in school.
Use our private student loan calculator to see what your payment would be and how much you’d repay over the life of the loan under each repayment plan.
Student Loan Repayment Strategies to Pay Off Your Debt Faster
Once you graduate, there are ways to accelerate your debt repayment and reduce the amount of interest that accrues.
1. Make Extra Payments
If you want to pay off your debt faster and are thinking about different student loan repayment strategies, consider increasing your minimum monthly payments.
More of your payment will go toward the principal each month, reducing how much you’ll pay in interest and allowing you to pay off the debt ahead of schedule.
For example, if you had $30,000 in student loans at 6.5% interest and a 10-year repayment term, your monthly payment would be $341 per month. If you only made the minimum payments, you’d repay a total of $40,877.27.
If you increase your payments to $391 per month — an addition of just $50 per month — you’d pay off your loans 20 months early. And, you’d repay just $38,881. By adjusting your monthly payment, you’d save $1,996.
2. Use the Debt Avalanche or Debt Snowball Methods
If you have multiple student loans, consider using either the debt avalanche or debt snowball method to tackle your debt.
With the debt avalanche method, you make extra payments toward the loan with the highest interest rate.
With the debt snowball, you target the debt with the lowest balance first.
Which is best for you? It depends on your goals and habits. Learn more in our breakdown of the debt snowball and debt avalanche method repayment strategies.
3. Refinance Your Debt
Student loan interest rates have a big impact on your overall repayment. By refinancing your student loans, you can qualify for a lower interest rate, so more of your monthly payment goes toward the principal. Over time, refinancing can help you save a significant amount of money.
For example, if you had $30,000 in student loans at 7.5% interest and a 10-year repayment term, refinancing could be a good idea. Depending on your credit, you could qualify for a 10-year, fixed-rate loan with an APR as low as 5.5%. With the lower rate, you’d repay $39,069 — a savings of over $1,800.
The Bottom Line
Understanding how future payments might look will help you identify student loan options (including rates, terms, and repayment plans) that suits your current and future goals. Keep in mind that a longer-term repayment plan may seem like the best option, but you may end up paying more in interest than you would on a shorter-term plan.
If you have questions, our Student Loan Advisors are always happy to help! Contact us to help answer your concerns about how your payments may affect you now and years down the road.
