SoFi

Ever have a friend complain about how the payments they’re making towards their loans aren’t actually going to pay off…well, the freakin’ loans? Your friend is onto something.

At the beginning stages of a loan, a big proportion of the loan payments that a borrower makes are applied towards the loan’s interest as opposed to the principal balance. Especially if the loan is spread out over a long time-frame such as many years, most early payments are applied almost totally to interest.

Due to a method of calculation called amortization, loan payments are split between interest and principal, heavy on the interest in the beginning stages. Towards the end, the effect usually reverses. When an amortization calculation is displayed visually, it is called an amortization schedule and graph.

We’re going to get into some of the nitty-gritty amortization info, but before we go there, we just want to be straight with you: This is an incredibly complex topic. We’re going to try to break it down the best we can, but please understand that this info is general in nature and does not take into account your specific objectives, financial situation, and needs; it should not be considered advice. SoFi always recommends that you speak to a professional about your unique situation. Okay, and we’re back in.

Amortization is calculated on all installment loans, which are loans that have regular, predetermined monthly payments, such as mortgages and student loans. Below, we will discuss how amortization is calculated, take a closer look at student loan amortization and a student loan amortization schedule, and explore some ideas for borrowers who want to lessen the amount they’ll pay in interest over time.

Understanding Amortization

Before we dive into a student loan amortization calculation and schedule, it is helpful to first understand the basics of calculating the cost of a loan. You’ll need to know these three variables:

1. The value of the loan, also known as the principal
2. The interest rate on the loan (and whether it is fixed or variable)
3. The duration, or length, of the loan (usually given in months or years)

With this information, it is possible to determine both the monthly payment on the loan and the total interest paid during the life of the loan, assuming all payments are made. Although the math itself is difficult, it is easy to plug the information into an online student loan interest calculator.

The next step is to determine how much of each monthly payment is going towards both interest and principal. This is where the amortization calculation and the amortization schedule come in. As mentioned, amortization happens only on “installment” loans, and all student loans are installment loans.

There are two types of loans: installment loans and revolving credit. A mortgage, student loan, or car loan are all examples of installment loans. With an installment loan, the borrower is loaned an amount of money (called the principal) to be paid back over a designated amount of time, with interest.

Revolving credit, on the other hand, is not a loan disbursed in one lump sum, but is a certain amount of credit to be used as the borrower pleases, up to a designated limit. A credit card and a line of credit are forms of revolving credit.

A borrower’s monthly payment on revolving credit is determined by how much of the available credit they are using at any given time; therefore, minimum payments change from month to month.

Student Loan Amortization Examples

Because student loans are a form of installment loan—a specific amount of money is disbursed to the borrower—student loans are amortized. Parts of each payment are spent on both the loan’s principal and its interest.

At the front-end of the loan, a much larger proportion will be allocated to interest. Due to the way compounding returns work, the effect is more dramatic the longer the length of the loan.

Take, for example, a $30,000 loan at 7% fixed interest rate amortized over a 10-year repayment period. The borrower’s monthly payment is $348.33 total (rounded down to $348 for simplicity in the grid below). Each year, the hypothetical borrower will pay $4,180 total towards their loan.

This never changes, although the proportion that is paid both towards principal and interest will. Here’s how that hypothetical borrower’s hypothetical loan amortization might look. (All examples calculated using this student loan interest calculator, by Bankrate .)

Amortization Schedule Student Loan $30,000, 7% interest over 10 years starting January 2019

So, during the first year, the example borrower’s monthly payments are made up of about half interest and half principal. At the end of that first year, the borrower has paid $4,180 total towards their student loan. $2,032 of that went to interest, while $2,148 went to paying down the principal.

At the end of the first year, the loan is not reduced by the total amount the borrower had paid, but only the amount paid towards the principal—the $2,148. The $30,000 loan is therefore valued at $27,852 at the end of the year.

That’s the whole thing with amortization—because only a small proportion of payments is applied to the loan’s principal at the early stages, the interest rate charges continue to be calculated off a relatively high loan balance figure. Eventually, this swings in the other direction as the loan’s principal is reduced.

With each passing month and year paying down debt, more of each payment is allocated towards the principal. By the ninth and final year, the borrower pays only $154 to interest and $4,026 to principal.

Let’s look at another example of a hypothetical student loan amortization schedule, but along a longer timeline, such as twenty years. It should be noted that a twenty-year payback period isn’t “standard” for federal student loans, but the important takeaway here is the impact of time on amortization calculations.

Here’s a table with the results of a hypothetical $60,000 student loan at a 7% fixed rate, paid back over 20 years.

Amortization Schedule Student Loan $60,000, 7% interest over 20 years:

In this example, each monthly payment for the 20-year duration is $465.18 (again, rounded down to $465 for simplicity’s sake above). In January 2019, the first month of the first year of the loan, $350 is paid towards interest, and just $115 is paid towards the principal. That’s less than 25% of the total payment, compared to 50% in the previous example.

By the end of the hypothetical loan, hardly any of the payment is allocated towards interest, and the majority is applied to the principal. In the very last monthly payment in the last year, only $3 goes towards interest and $462 to principal. In the last year, only $206 total goes towards interest versus $4,155 in the first year.

To calculate your student loan amortization schedule, you too can use an online calculator . It can also be really helpful to see the numbers in graph form, and to see each amortized payment listed out—so you know how much of your money is going to both interest and principal in each monthly payment.

Can You Pay Less Interest on Your Loans?

If amortized payments are frustrating to you, you’re not alone. One way to possibly alleviate the pain is to pay your loan back faster than the stated term. Especially at the beginning of the loan’s repayment term, making additional payments towards the principal might lower what you’ll owe in interest.

If you go this route, consider letting your lender know that the additional payment is to be applied to the principal of the loan, not the interest. If you are mailing a check, you could include a note. If you’re making a payment online, you may want to call your loan servicer to make sure that they apply the money correctly.

For borrowers with multiple loans that want to expedite their debt payment, it’s hard to know where to start. If your goal is really to nip loan amortization in the bud, you might want to consider the “debt avalanche” method of debt repayment.

Using this method, you would choose the source of debt with the highest interest rate and work on “attacking” it first, while making the minimum payment on all other loans. After the highest interest rate loan is paid off, you would move to the next highest interest rate loan, and so on.

Graduates can also consider refinancing their student loans. When you refinance, you’re essentially paying off your old loan or loans with a new loan from a private lender, like SoFi. Ideally, you refinance in order to get a lower rate on your loans than you currently have.

No matter your current financial standing, it’s usually worth checking to see if you qualify for a lower rate than you’re currently paying. With refinancing, you’re also usually able to adjust other terms to your loans, such as the repayment schedule. You can extend it, if you’re looking for lower monthly payments, or shorten it, if you want to pay less in interest—and outsmart amortization—on your loan.

Borrowers shouldn’t refinance their loans if they’re currently using one of the special federal loan repayment plans such as income-driven repayment or Public Service Loan Forgiveness. When you refinance, you will lose access to these programs. Otherwise, it’s usually worth looking into.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

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With all the benefits that come with higher education, there’s one potential pain point that can easily sour the mood—paying for it. With the rising cost of college, more and more students are taking out student loans to finance their educations.

On average, students graduating from undergraduate programs carry approximately $33,310 in student loan debt . And for those students pursuing additional degrees, the student loan burden is even higher. But what options are available to those facing the reality of student debt?

One possible solution is student loan refinancing. At its core, student loan refinancing is the process of taking out a new loan to pay off your existing student loans. This leaves you with just one loan with a new interest rate, monthly payment, and loan terms.

What Does Student Loan Refinancing Do?

If you borrowed federal student loans, they were granted based on the information you filled out in your Free Application for Federal Student Aid (FAFSA®). All federal student loans since July 1, 2006 are fixed-rate loans, and the interest rate is determined by Congress. Those loans could have been either subsidized or unsubsidized, depending on your financial need at the time you filled out your FAFSA.

If you took out private loans, the interest rate was determined based on your or your parents’ credit scores and other financial factors. As a young student, it’s likely you didn’t have a long credit history or employment history (hence getting your parents to cosign). Because of this, most lenders would have considered you a risky borrower, which means you likely either applied with a cosigner or took out a loan with a relatively high interest rate.

Refinancing student loans gives you the opportunity to change that. When you refinance your student loans, you usually do so with a private bank or lender, like SoFi, who will review your credit history and earning potential (among other financial details) to determine your new interest rate.

Since you’ve graduated, you may have significantly improved your finances. And if you took the opportunity to build up some credit in college, you could qualify for a lower interest rate when you refinance.

This is one of the biggest potential benefits of refinancing your student loans. With a lower interest rate, you could stand to reduce the money you spend in interest over the life of the loan, especially if you also shorten your loan term. If, on the other hand, you lengthen your loan term, you’re unlikely to reduce the amount of interest you pay over the course of the loan.

When you originally borrowed your student loans, you likely agreed to a certain repayment term. Refinancing may allow you to adjust your repayment terms, though of course which terms you have access to is up to the lender’s discretion. On the other hand, you could also extend the loan term, which could get you lower monthly payments, but likely means you pay more in interest over time.

If you refinance your student loans, instead of having multiple loans and multiple monthly payments, you’d have one single loan payment.

If you refinance federal student loans, they’ll become private loans, which means you’ll lose access to federal repayment plans . This is especially important to note if you plan on taking advantage of programs like income-driven repayment or Public Service Loan Forgiveness (PSLF).

You’ll also lose access to federal borrower protections like deferment and forbearance , which allow you to temporarily pause your monthly payments if you are facing financial or personal hardship.

Choosing a student loan repayment plan and strategy is a personal decision. Take the time to carefully review your current loan terms and benefits before you decide to refinance. There are a variety of refinancing options out there and it’s important to do your research and find a reliable lender or stick with your original federal student loan repayment plan.

How Do You Refinance Your Student Loans?

The student loan refinancing process will vary slightly by lender. Before you make any decisions, you may want to check the rates at multiple lenders to make sure you are getting a competitive rate. Many online lenders and banks will let you check your interest rate online in just a couple of minutes.

If you meet the lender’s eligibility requirements, you’ll most likely see a few different options with varying repayment terms. You’ll also usually get to choose between a variable rate and a fixed rate loan.

After you get the quotes, you can compare the estimates and lenders. You may want to review things like the interest rate, any fees associated with the loan, and the lender’s reputation.

If you decide to continue with a lender, you’ll have to file a formal application to refinance your student loans. When you formally apply, lenders will conduct a hard credit check (which could affect your credit score). To apply, most lenders require the following items:

•  Proof of citizenship

•  Proof of income

•  A valid ID number

•  Official statements for all of your federal and private student loans

If you are applying with a cosigner, you’ll also need to submit their information—your lender should inform you about what you’ll need.

Refinancing Your Student Loans with SoFi

If you’re interested in seeing how refinancing can help you take control of your student loan debt, you can use SoFi’s student loan refinancing calculator. If you decide refinancing is the right choice for you, at SoFi, there are no origination fees or prepayment penalties.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

Do you have multiple accounts that hold your money across different banks? If you’re like a lot of people, you keep one account for your savings, and yet another for checking. Some people have additional accounts for their retirement savings or after-tax investments—but that’s a whole different can of worms.

For those looking for a better way to manage their checking and savings, there’s another account that should be on your radar: a checking and savings account. It’s a hybrid between a checking and a high-yield savings account. You can write checks and they’ll even issue you a debit card. In this article, we’ll answer the question, “What is a checking and savings account,” along with a discussion of their benefits, how they’re used, and who might benefit from using this type of account.

What Is a Cash Management Vehicle?

A checking and savings account—also known as a cash management vehicle—is designed to manage cash, make payments, and earn interest. It’s a hybrid between a checking and savings account.

Cash management accounts typically come equipped with checking account features such as a debit card and ATM withdrawals. They also typically pay a higher rate of interest than keeping your money in a traditional savings account. If you have a checking account, you know how little they pay in interest; .08% is the national average .

Cash management accounts are often all-in-one accounts, and they can combine features of a checking account, brokerage account, and an interest-bearing savings account. (Not all checking and savings accounts include all these features, though.)

While checking and savings accounts used to be limited to those with high balances in brokerage accounts, this is no longer always the case. For example, online-only financial services companies are breaking the mold by offering similar accounts to those without a brokerage account or without having to meet a minimum balance requirement. They’re able to offer higher interest rates because they don’t maintain brick and mortar locations.

What to Look for in a Checking and Savings Account

While most checking and savings accounts share similarities, they won’t all be the same. Here are some items to consider when shopping around for a checking and savings account.

Safety

FDIC (Federal Deposit Insurance Corporation) insurance protects your money in the event your bank goes belly-up. For your safety and protection, it is essential that your checking and savings account is FDIC-insured. Some banks offer more coverage by using a system that spreads their deposits across several banks (this is done behind the scenes). For example, SoFi Checking and Savings offers $1.5 million in FDIC insurance per account.

Interest Rate

Generally, you’re able to get a higher rate of interest within a checking and savings account than you are with a savings account at a brick and mortar bank. This interest rate will likely not be as high as in an online-only savings account, the trade-off being that an online-only savings account will usually limit your access to your money. SoFi Checking and Savings has aspects of a high-yield savings account and a checking account.

Accessibility

When deciding on an account, you’ll want to investigate its accessibility. Cash management accounts usually offer either a credit card or debit card hooked up to the account, allowing you to use it as if it were a checking account.

Most will also allow you to withdraw money at an ATM and set up bill pay. (For comparison, some high-yield savings accounts only allow you to access your money a certain number of times per month. Limiting the number of transactions in an account allows them to offer a higher interest rate.)

Fees

As with most types of bank accounts, there is a possibility for fees, such as monthly or annual account maintenance fees, or fees to use out-of-network ATMs. Conversely, some checking and savings accounts will actually reimburse you for any ATM fees you incur.

If you travel internationally, also be sure to check the account’s policy on international transactions and ATM usage. SoFi Checking and Savings, for instance, reimburses 100% of all ATM fees, even internationally, on qualified accounts.

Bank Locations

Brick and mortar locations for checking and savings accounts are limited because in the past, most checking and savings accounts have been offered by brokerage banks. Brokerage banks do have physical locations, but they’re often limited to large cities.

If it’s important to you to be able to walk into a location, you’ll want to research whether there is on near you. Online-only banks specifically opt out of providing physical locations, often so they can offer more by way of interest rates. This will likely become more common as financial services move the majority of their operations online.

Who Should Use a Checking and Savings Account?

Because a cash management vehicle is a hybrid between checking and high-yield savings accounts, they would suit anyone who would like to consolidate the two. Most financially savvy folks understand that larger cash balances should be earning more interest than is offered in a “regular” checking account, but dislike coordinating checking and savings accounts at different banks.

Really, anyone looking to consolidate and elevate their finances should, at the very least, research a cash management vehicle to see whether it makes sense given their financial goals and the structure of their current accounts.

A checking and savings account is an excellent place to save up for short to mid-term goals, such as an emergency fund, a down payment for a home, for a wedding, or an exotic trip to celebrate paying off student loans.

As the landscape of financial services changes, it’s a good idea to stay up to date on advances in technology and improvements to the services provided to consumers. For a long time, brick and mortar banks had very little competition, as the physical locations (and convenience) were paramount to effective banking. As banking moves online, those with the most branches won’t necessarily be the ones providing the best customer service or the most competitive interest rates.

SoFi, who has been leading the charge in refinancing student loans to lower rates, is expanding its business to offer a checking and savings account that offers an interest rate competitive with high-yield savings accounts. They’re able to do so precisely because they don’t maintain physical branches—and understand the need for a more versatile checking and savings account that’s easy to use and and has no fees.

SoFi can’t guarantee future financial performance.
This information isn’t financial advice. Investment decisions should be based on specific financial needs, goals and risk appetite.
Neither SoFi nor its affiliates is a bank.
SoFi Checking and Savings^TM is offered through SoFi Securities, LLC, member FINRA/SIPC.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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There are so many upsides to investing in your education—the personal enrichment and possibility of a bright and fruitful future being the most obvious. But, there are also some potential downsides that are hard to ignore, one of the main ones—if you’re like so many others—being the debt you may accrue.

Before you start losing sleep over your looming financial obligations, read on to gain a better understanding of how student loans work, starting with “the language of loans.”

Getting a grasp on certain student loan terms and concepts can benefit you in a few ways. For one thing, you’ll be able to better understand your student loan options, which means you can more easily compare features and fine print. That allows you to make confident decisions about your loans and, perhaps most importantly, save some money along the way.

So, what are the student loan terms every borrower should know? Here are a few of the big ones:

The Basics of Student Loans

Borrowing a loan can have long-term financial consequences so it’s important to fully understand the fees and interest rates that will affect the amount of money you owe. Here are a few of the most important terms to understand before you take out a student loan:

Principal

This is the original amount of money borrowed, plus any capitalized interest and fees. Capitalized interest is accrued interest that is added to the principal balance.

Term

The loan term is the amount of time the student loan will be in repayment. Loan terms vary by lender, and if you have a federal loan, you are usually able to select your repayment plan.

Annual Percentage Rate

Commonly referred to as APR—this is the cost of borrowing, expressed as an annual percentage. APR includes any fees associated with the loan, providing a more comprehensive view of what you are being charged. Depending on the fees associated with your loan, the APR could be a bit higher than the interest rate.

Accrued Interest

The amount of interest that has accumulated on a loan since your last payment.

The Potential Student Loan Pitfalls

Once you understand loan basics and have secured your student loans, there are a few more terms to know. Making sure you understand your repayment terms and options like deferment or forbearance will allow you to find the best strategy to pay off your student loans quickly.

Forbearance

The temporary postponement of student loan repayment during which time interest typically continues to accrue. If your student loan is in forbearance you can either pay off the interest as it accrues, or you can allow the interest to accrue and it will be capitalized at the end of your forbearance.

You will usually have to apply for forbearance with your loan holder and will sometimes be required to provide documentation proving you meet the criteria for forbearance. For a loan to be eligible for forbearance, there must be some unexpected temporary financial difficulty.

Deferment

Similar to forbearance, deferment is the temporary postponement of student loan repayment. During deferment, interest may or may not continue to accrue, depending on the type of student loan you have. In
the case of federal loans , the government may pay the interest on your Perkins, Direct Subsidized and/or Subsidized Stafford loans.

Capitalized Interest

This is when accrued interest is added to your loan’s principal balance. Most student loans begin accruing interest as soon as you borrow them. While you are often not responsible for repaying your student loans while you are in school or during a grace period or forbearance, interest will still accrue during these periods. At the end of said period, the interest is then capitalized, or added to the principal of the loan.

If you make your payments on time each month, you’ll keep accrued interest in check. However, after a period of missed or reduced payments (such as forbearance), accrued interest may be capitalized, which can cost you more money in the long run.

When interest is capitalized, it increases your loan’s principal. Since interest is charged as a percent of principal, the more often interest is capitalized, the more total interest you’ll pay. This is a good reason to use forbearance only in emergency situations, and end the forbearance period as quickly as possible.

Consolidation

The act of combining two or more loans into one single loan with a single interest rate and term. The resulting interest rate is a weighted average of the original loan rates.

Consolidating can make your life simpler with one monthly bill and payment, but it’s important to understand that it doesn’t actually save you any money. In fact, if you opt for lower payments when consolidating, this is typically accomplished by lengthening your loan term, which means you’ll pay more interest over the life of the loan.

The Potential Money-Savers

Building a repayment plan and sticking to it is one of the best ways to repay your student loans quickly, while spending the least amount of money on interest. Now that you understand what could cause your interest to skyrocket, here are a few terms that could help you reduce the money you spend over the life of your loans.

Automated Clearing House (ACH)

This is an automatic loan payment that transfers directly out of your bank account to your lender or loan servicer each month. The benefits of ACH are two-fold—not only can automatic payments keep you from forgetting to pay your bill, but many lenders also offer interest rate discounts for enrolling in an ACH program.

Refinancing Your Student Loans

Refinancing is the act of taking out a new loan at a lower interest rate and using it to pay off your original loan(s). Often times, refinancing your student loans allows you to lower your interest rate on your loans.

This is one of the fastest ways to slash your student loan burden. Not only does refinancing reduce the total amount of interest you’ll spend over time, but it can also decrease your monthly payments or allow you to pay off your loan sooner.

To see how refinancing your student loans could help alleviate some financial burden, take a look at SoFi’s student loan calculator. When you refinance with SoFi, there are no origination fees, application fees or prepayment penalties.

With good earning potential and credit history, you could qualify for a lower interest rate than the one you currently have. Refinancing your loans could help you manage your student loan payments.

Prepayment

Paying off a loan early or making more than the minimum payment. Both federal and private loans allow for penalty-free prepayment, which means you can pay more than the monthly minimum or make extra payments without incurring a fee.

The more you do it, the sooner you’re done with your loans—and the less interest you’ll spend over the life of your loan.

Whether you need help paying for school or help paying off the loans you already have, SoFi offers competitive interest rates and great member benefits as well.

The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

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