When deciding on a student loan repayment schedule, the option with the lowest possible monthly payment is not always best.
That’s because of amortization, the process of paying back a loan on a fixed payment schedule over a period of time. A repayment option with the lowest monthly payment typically means the loan is stretched out over a longer time frame. This results in the borrower paying more in interest than they would have with a shorter loan term and a higher monthly payment.
Read on to learn more about an amortized student loan, how it affects your monthly payments, and ways to potentially lower the amount you pay in interest on your student loans.
Exploring Amortization
Amortization is common with installment loans, which have regular monthly payments. Are student loans amortized? Yes, because they are installment loans.
With an amortized student loan, a borrower pays both the principal balance and interest each month. This is called a student loan amortization schedule. The schedule begins with the full balance owed, and the payments are then calculated by the lender over the life of the loan to cover the principal and interest.
At the beginning of an amortization schedule, payments typically cover more interest than principal. As time goes on, a bigger amount goes toward the principal.
To help determine amortization on your student loans, it’s important to first calculate the cost of the loan. You’ll need to know these three variables:
2. The interest rate and annual percentage rate (APR)
3. The duration, or term, of the loan (usually given in months or years)
Using this information, it is possible to determine both the monthly payment on the loan and the total interest paid on the loan. A student loan interest calculator can help you figure this out.
The next step is to determine how much of each monthly payment is going toward both interest and principal. That’s when the loan’s amortization schedule comes into play.
💡 Quick Tip: Get flexible terms and competitive rates when you refinance your student loan with SoFi.
Student Loan Amortization Examples
To understand how student loan amortization works, let’s say a borrower takes out a $30,000 student loan at 7% interest rate amortized over a 10-year repayment period.
The borrower’s monthly payment is approximately $348. Each year, the borrower will pay about $4,180 total on their loan. While these monthly and yearly amounts will remain the same, the proportions allocated to the principal and interest will change.
The chart below shows you what a student loan amortization schedule might look like for a $30,000 loan at 7% interest over 10 years. The chart illustrates the principal and interest amounts monthly for the first year and the last year of the loan, and annually for the years in between.
Amortization schedule for $30,000 student loan with 7% interest over 10 years
| Date | Interest Paid | Principal Paid | Balance |
|---|---|---|---|
| January 2024 | $175 | $173 | $29,827 |
| February 2024 | $174 | $174 | $29,652 |
| March 2024 | $173 | $175 | $29,477 |
| April 2024 | $172 | $176 | $29,301 |
| May 2024 | $171 | $177 | $29,123 |
| June 2024 | $170 | $178 | $28,945 |
| July 2024 | $169 | $179 | $28,765 |
| August 2024 | $168 | $181 | $28,585 |
| September 2024 | $167 | $182 | $28,403 |
| October 2024 | $166 | $183 | $28,221 |
| November 2024 | $165 | $184 | $28,037 |
| December 2024 | $164 | $185 | $27,852 |
2024
| $2,032 |
$2,148 |
$27,852 |
|
| 2025 | $1,877 | $2,303 | $25,852 |
| 2026 | $1,710 | $2,470 | $23,079 |
| 2027 | $1,532 | $2,648 | $20,431 |
| 2028 | $1,340 | $2,840 | $17,591 |
2029
| $1,135 |
$3,045
| $14,546 |
|
2030
| $915 |
$3,265
| $11,281 |
|
2031
| $679 |
$3,501
| $7,780 |
|
2032
| $426 |
$3,754
| $4,026 |
|
| January 2033 | $23 | $325 | $3,701 |
| February 2033 | $22 | $327 | $3,374 |
| March 2033 | $20 | $329 | $3,045 |
| April 2033 | $18 | $331 | $2,715 |
| May 2033 | $16 | $332 | $2,382 |
| June 2033 | $14 | $334 | $2,048 |
| July 2033 | $12 | $336 | $1,712 |
| August 2033 | $10 | $338 | $1,373 |
| September 2033 | $8 | $340 | $1,033 |
| October 2033 | $6 | $342 | $691 |
| November 2033 | $4 | $344 | $346 |
| December 2033 | $2 | $346 | $0 |
| 2033 | $154 | $4,026 | $0 |
Using this estimated example, during the first year, the borrower’s monthly payments would be about half interest and half principal. With each passing month and year of paying down debt, more of each payment is allocated to the principal. By the final year, the borrower pays only $154 to interest and $4,026 to principal.
To see how a longer loan term can affect amortization, here is a student loan amortization schedule with a longer timeline of 20 years. It’s important to note that a 20-year payback period isn’t standard for federal student loans — this example is to illustrate the impact of time on amortization calculations.
Amortization schedule for the first year and last year of payment on a student loan of $60,000 with 7% interest over 20 years:
| Date | Interest | Principal | Balance | January 2024 | $350 | $115 | $59,885 |
|---|---|---|---|
| February 2024 | $349 | $116 | $59,769 |
| March 2024 | $349 | $117 | $59,652 |
| April 2024 | $348 | $117 | $59,535 |
| May 2024 | $347 | $118 | $59,417 |
| June 2024 | $347 | $119 | $59,299 |
| July 2024 | $346 | $119 | $59,179 |
| August 2024 | $345 | $120 | $59,060 |
| September 2024 | $345 | $121 | $58,939 |
| October 2024 | $344 | $121 | $58,817 |
| November 2024 | $343 | $122 | $58,695 |
| December 2024 | $342 | $123 | $58,573 |
| 2024 | $4,155 | $1,427 | $58,573 |
| January 2043 | $31 | $434 | $4,942 |
| February 2043 | $29 | $436 | $4,506 |
| March 2043 | $26 | $439 | $4,067 |
| April 2043 | $24 | $441 | $3,626 |
| May 2043 | $21 | $444 | $3,182 | June 2043 | $19 | $447 | $2,735 |
| July 2043 | $16 | $449 | $2,286 |
| August 2043 | $13 | $452 | $1,834 |
| September 2043 | $11 | $454 | $1,379 |
| October 2043 | $8 | $457 | $922 |
| November 2043 | $5 | $460 | $462 |
| December 2043 | $3 | $462 | $0 |
| 2043 | $206 | $5,376 | $0 |
In this example, each monthly payment for the 20-year duration is $465. In January 2024, the first month of the first year of the loan, $350 is paid towards interest, and $115 is paid towards the principal. That’s less than 25% of the total payment, compared to 50% in the previous example.
In the last year of the loan, only $206 total goes towards interest versus $4,155 in the first year.
If you’re interested in expediting your loan payoff, you may want to explore different loan lengths to see how much you could save on interest if you shorten the term.
Alternative Repayment Plans and Amortization
In addition to the standard 10-year federal student loan repayment plan, there are some alternate repayment plans such as income-driven repayment (IDR) plans. There are four types of IDR plans:
• SAVE (Saving on a Valuable Education) plan
• PAYE (Pay as You Earn) plan
• Income-Based Repayment (IBR) plan
• Income-Contingent Repayment (ICR) plan
Each of these plans uses your income and family size to determine what your payments are.
Depending on an individual’s discretionary income and family size, the monthly payments with IDR plans are generally lower than with the standard, 10-year repayment plan because repayment is stretched out over 20 or 25 years. At the end of that time, any remaining balance you owe is typically forgiven.
While IDR may be a good option if you’re having trouble affording your monthly payments, it’s important to understand that not only will you likely pay more in total interest over the course of the loan because the term is longer, but it is also possible that your payments will dip into what is called negative amortization.
Negative amortization on a student loan is when your monthly payment is so low that it doesn’t even cover the interest for that month. When this happens, it can cause the loan balance to increase.
This is not ideal, of course, but utilizing an income-driven repayment plan is a far better option than missing payments or defaulting on a federal student loan. Using an income-driven repayment plan is also necessary if the borrower plans on utilizing the Public Service Loan Forgiveness (PSLF) program.
💡 Quick Tip: When refinancing a student loan, you may shorten or extend the loan term. Shortening your loan term may result in higher monthly payments but significantly less total interest paid. A longer loan term typically results in lower monthly payments but more total interest paid.
Managing Student Loan Amortization
To avoid the full impact of an amortized student loan there are several steps you could take to potentially help lower your interest payments.
Pay back your student loans faster than the stated term.
You can do this by paying more than you owe each month, or by making additional payments on your student loan, if you can afford to. Paying off the loan in advance may help you to pay less interest over the life of the loan.
If you opt to pay more than your minimum payments or make additional payments on your loans, it’s a good idea to let your lender know that the additional amount or payment should be applied to the principal of the loan, not the interest. That way, the extra amounts can help lower the principal amount you’re paying interest on.
Explore debt reduction methods.
For borrowers with multiple federal or private student loans who want to expedite their debt repayment, it can sometimes be hard to know where to start.
If your primary goal is to reduce the overall amount of interest you owe, you might want to consider the debt avalanche method of debt repayment. Using this technique, you choose the student loan debt with the highest interest rate and work on tackling it first. You would do this while making the minimum payment on all other loans or sources of debt. After the loan with the highest interest rate is paid off, focus on the loan with the next highest interest rate, and so on.
Refinancing student loans.
When you refinance a student loan, you’re essentially paying off your old loan or loans with a new loan from a private lender. Ideally, with refinancing, you would get a lower interest rate if your credit score and income qualify.
You might also be able to shorten the repayment term to pay off the loan faster, or lengthen the term to lower your monthly payments. Just remember, you may pay more interest over the life of the loan with a longer loan term.
When considering whether to refinance, borrowers should think carefully about the benefits their federal student loans have, such as income-driven repayment and the Public Service Loan Forgiveness option. When you refinance federal loans with a private lender, you lose access to these federal programs.
Weigh all your options to help determine what course of action makes the most sense for you.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
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