interest payments not principal

When Federal Payments Go Mostly Towards Interest

Michael Lux Blog, Strategy, Student Loan Plan, Student Loans 0 Comments

In this edition of the student loan plan, we take a look at George’s student loan strategy.  His monthly payments are almost all being used for interest while his principal balance is barely moving.  He would like to put together a plan to attack his debt.  If you want tips for dealing with your student loans, send us an email.

George writes:

Thank you for the website.   I currently have the following loans: Direct Sub Consolidation Loan Repayment of $8,894.15 and Direct Unsub Consolidation Ln Repayment of $96,343.47. I’m on the standard repayment plan.  I currently work for the federal government (law enforcement) and I teach at a local university.  I have been making payments  since 2002 with a break during my doctorate degree from 2009-2015.  My original balance in 2015 was $124,000.  I feel that I am spinning my wheels making larger payments because most of it is eaten up by interest.  I called FEDLOAN and they stated that I should make an additional payment after my standard payment and call them to tell them it is a principle payment.  That seems ludicrous to me since everything over the payment amount should go to principle.   Is there a better way to get this paid off?  Some months I can pay up to $3,000 others the standard payment of $750.  I always try to pay more to lower the principle.  I paid a total of $10,000 lat year and only $1000 came of the principle. I’m really getting frustrated.  

I thought about doing the Public Service Loan Forgiveness (PSLF) but I’m unsure if that will prolong my payments.  I’m retiring in 4 years and going to teach at the university after that.  I’m not sure I’ll get the benefit from the program.

Based on my details above, what are my best options?

Very respectfully,


Options When Payments Go Towards Interest and Not Principal

George’s issue boils down to one simple problem.  His student debt is generating so much interest that the monthly payments barely touch the principal balance.  As a result, the repayment of the loans seemingly lasts forever.

Generally speaking, there are usually two ways to fix this problem: make larger payments or lower the interest rate.  However, because George has federal student loans there are actually three routes he has to choose from.

The Public Service Option

One of the first questions that George must answer is whether or not he will pursue Public Service Loan Forgiveness.  From George’s email, it sounds as though he doesn’t think he has made any eligible payments.  Before making any decisions, George should probably first submit an employer certification form.  Not only with this form help George verify that his employer is eligible for PSLF, but it will also check to see whether George is currently on an eligible repayment plan and whether or not his loans are eligible in their current form.

Because Public Service Loan Forgiveness doesn’t require a formal enrollment to start, it is possible George is well on his way to getting his loans forgiven.  Sadly, this is an unlikely outcome due to the many hoops that must be jumped through in order to qualify for PSLF.  Though unlikely, it is definitely worth checking.

If George doesn’t have any eligible payments towards PSLF, the four years of remaining work for the federal government will not get him there.  At that point, the question becomes whether or not his next job will be eligible.  If there is a chance he will be pursuing PSLF in the future, and he hasn’t made any payments yet, George should consider switching to an income-driven repayment plan in order to start counting towards the required 120 payments for PSLF.

The Aggressive Repayment Option

In Goerge’s current situation, most of his monthly payment goes towards loan interest due to the large balance of his student debt.  His instinct to pay extra to knock it down is a good one.

The idea behind aggressive repayment is that the extra money paid goes towards the principal balance.  The benefit of the extra payments can snowball.  Each extra payment lowers the principal balance and the smaller pile of debt will generate less interest.

The best way to look at it is to think of principal payments as money that goes towards relieving your debt obligation while interest payments go towards lender profits.  If George makes his monthly payment of $750, it sounds like only about $75 is reducing his principal balance while the rest is profit for the lender.  If he is able to make a $3,000 payment, the vast majority of that payment will go towards principal.

There shouldn’t be a need to specify if the payment should be applied towards principal or interest, as the monthly interest is a predetermined calculated amount.  Everything else should be put towards principal.  However, the best practice is still to closely follow statements to make sure that the interest charges are going down each month.  If they go up, it could be the sign of a calculation error.

The thing that usually needs specified to lenders is the loan that the extra payment should be applied to.  Generally speaking, first paying down the loan with the highest interest rate is the best way to aggressively eliminate the debt.

The Refinance Route

Another way to lower monthly interest spending is to refinance the debt at a lower interest rate.  In George’s case, this option would likely be a mistake.  Federal loans have certain perks, such as income-driven repayment plans and PSLF. In George’s case there is a chance that he might take advantage of these programs.  Because PSLF could result in significant savings, it is best to keep the loans with the federal government.

Refinancing makes sense for borrowers who have private loans with high interest rates and for federal borrowers who will be paying their loans off in full without needing any of the federal perks.  For more on refinancing, be sure to check out our list of student loan refinance lenders and tips for the process.

Bottom Line

George’s large federal student debt is generating a lot of interest each month.  As a result, only a small portion of his monthly payments lower the balance.  Most of the money paid goes towards interest.  Borrowers in this situation have three basic options: chase after PSLF, aggressively repay the debt, or refinance.  The best route depends upon a number of different circumstances and it could change over time.

The key to handling this situation is to understand the pros and cons of each choice and to make the decision that best fits your needs and financial goals.