As you work to pay down your student loan debt, you might look at the monthly balance and feel like you’re not making much progress. 

After all, if you make a payment of $400 toward a loan of $15,000, shouldn’t your balance be $14,600? Why has the needle barely moved so that you still owe $14,900?

The answer is in something called amortization. When a student loan is amortized, it’s all about how much of your payment each month goes toward interest and how much goes toward the principal. Let’s take a look at what an amortized student loan is and how amortization works.

What is an amortized student loan?

When you take out a loan, there are two main parts:

• Principal: The amount you borrow.
• Interest: An extra charge made by the lender. It’s the cost of borrowing money.

Interest charges are added to loans, and in the case of student loans, you pay interest on the interest charges. As a result, paying down your debt takes longer.

With an amortized loan, you pay a flat monthly payment and agree to pay for a set period. However, the portion of your payment that goes toward interest or the principal changes over time.

The amortization schedule reveals how much of each payment goes toward interest and how much goes toward the principal. Early in the loan amortization schedule, most of your student loan payment goes toward interest charges. That’s why it doesn’t look like your loan balance is going down much. 

Later, the proportion changes so that more of each payment goes toward reducing the principal, but you likely won’t see a huge difference until close to the end of your student loan’s repayment term. Amortization applies to both federal and private student loans.

How income-driven repayment and other plans impact student loan amortization

When you amortize student loans over time, you can end up paying even more. The shorter the schedule, the less you pay in interest. With income-driven repayment and other plans, the amortization changes a bit — and can result in paying thousands more in student loan interest.

You’re placed on the standard repayment plan when you first finish school, which amortizes your loan over 10 years. If the monthly payments are hard for you to handle, you might qualify for an income-driven repayment plan. These plans can extend your loan to 20 or 25 years.

The practical effect is that your monthly payment is reduced, making it more manageable. However, your loan still accrues interest. In fact, with some income-driven plans, you could end up owing even more than you started with because the interest keeps adding up, and it could be the case that none of your payments ever go toward the principal.

With income-driven plans, the remaining balance is forgiven after the end of the term, but while you’re on the plan, it can feel disheartening to see your loan balance rise, no matter how many payments you make.

Other payment plans, including federal loan consolidation, also can impact your amortization by lengthening your loan. Deferment and forbearance might add fees to your loan, boosting the balance and the interest that accrues later.

You can use the Loan Simulator tool offered by the Department of Education to get a feel for how different plans impact your federal student loan repayment.

How to reduce the impact of student loan amortization

You can’t stop the way a student loan amortizes. However, you can reduce the impact on your long-term finances by getting rid of the debt sooner. Here are some of the strategies you can use to get rid of your debt.

Make extra payments toward the principal

You can pay off your loan faster and save on interest — whether you have federal or private loans — with the help of extra payments.

Before you just make an extra payment, it’s essential to contact your lender or loan servicer to find out how they apply the additional payments. With federal student loans, extra amounts usually go toward the next month’s interest and any outstanding fees before they reduce the principal. As a result, you often need to make a separate payment and specify that you want it to go toward the principal.

With a private student loan, contact the lender to determine the process for making sure your extra payments go toward reducing the principal. If you make it a point to designate additional payments for the principal, you can reduce the amount you’re paying in interest and shave months — or even years — of your loan term.

Refinance your student loans

Another way to reduce the impact of amortization is to refinance your student loans. When you refinance, you pay off all your other loans with one bigger loan. If you can get a lower interest rate, you could save money, lower your payment and get rid of your debt faster.

When you compare refinancing offers with a site such as Juno, you can see what’s available and see how to potentially save money and time. 

While it’s possible to refinance your federal student loans as well as your private student loans, you need to be careful. If you refinance federal loans, you lose access to income-driven repayment and loan forgiveness programs. Decide if that’s something you want to risk before you refinance federal loans. If you’re eligible for loan forgiveness, that could be a better way to beat amortization than refinancing, depending on the situation.

Bottom line

You have to deal with interest whenever you get a loan, and student loans are no exception. Learn how student loan amortization works, and then look for strategies to reduce its impact on your finances. Suppose you can reduce your principal faster or refinance to a lower rate and different term length. In that case, you could save thousands in interest charges — even as you lower your monthly payment.