Paying extra on your student loans is typically the responsible decision. Larger-than-required payments save money on interest and eliminate student debt faster.
Unfortunately, paying extra isn’t always the best option for borrowers, especially those on an Income-Driven Repayment Plan like IBR or PAYE.
Borrowers considering student loan forgiveness need to use extra caution when making large payments towards their student loans. Mistakes have serious eligibility consequences.
Extra Payments May Ruin Eligibility for Forgiveness Programs like PSLF
Borrowers who pay extra towards their federal student loans go into “paid ahead” status. Any additional payments reduce the amount due the following month unless the borrower specifically requests a different treatment.
Historically, borrowers who were chasing PSLF lost progress due to this rule. If you had a $150 monthly bill and paid $200, the next month’s bill would be $100. Unfortuantely for borrowers, the bill paid for the following month wouldn’t count towards the 120 payments required for PSLF.
Fortunately, the Department of Education revised this rule last year, and “paid ahead” payments can still count towards PSLF.
Sadly, the Department of Education site still contains outdated info regarded paid ahead status. This opens up the possibility of confusion regarding extra payments.
For this reason, borrowers pursuing loan forgiveness should continue to only make minimum payments.
Sherpa Tip: If you are working towards forgiveness, there isn’t any financial incentive to pay extra.
Larger payments just mean that less debt eventually gets forgiven.
Paying extra will not help qualify for student loan forgiveness sooner than scheduled.
Paying Extra as Part of an Aggressive Repayment Strategy
IDR plans like IBR, PAYE and REPAYE are traditionally used by borrowers who cannot afford the monthly bill on the standard 10-year plan. However, the IDR plan perks go beyond the lower monthly bill.
One of the hidden benefits of using an IDR plan to get lower payments is that it can help borrowers qualify for a mortgage.
Borrowers on an IDR plan to help their debt-to-income ratio may still prefer to make extra payments as part of an aggressive repayment strategy.
In this instance, paying extra is an intelligent choice. However, the borrowers who fall into this category might improve their circumstances even further by refinancing their loans.
Extra IDR Payments if Forgiveness is a Possibility
Many borrowers don’t know if their path to debt elimination is repayment in full or counting on student loan forgiveness.
Figuring out a plan is preferred, but sometimes life’s many variables make it impossible to know which strategy is best.
If student loan forgiveness is still on your radar, paying extra isn’t the best choice. You can always set aside extra money for your student loans in a savings account. Once you realize forgiveness isn’t an option, use that money to lower your balance.
Extra payments don’t help qualify for forgiveness or make it happen any sooner. Additional payments just mean there is less debt to forgive once a borrower earns forgiveness.
Getting the Benefits of Making Larger Payments
Paying more than required on your student loans means quicker debt elimination and less spending on interest.
The strategy for extra payment is critical because most borrowers have more than one student loan and multiple types of debt.
Some borrowers choose to pay a little bit extra on all of their debts. This strategy will eliminate the debt faster and save money on interest, but it isn’t the best approach. I call it the $1,000 mistake made by responsible borrowers.
If you want to maximize the benefit of your extra payments, focus your efforts on one monthly bill, usually the one with the highest interest rate or smallest balance. Once that loan is eliminated, move on to the next one.
Paying extra on all of your loans might feel like the responsible decision. This option is far from the worst strategy, but it isn’t the best either.