We preach it all the time: extra payments towards your debt help you save money. But anyone can say anything nowadays. So we’re going to dive into exactly how extra payments help you save money, specifically student loan debt.
How It Works
Extra payments towards the principal balance of your student loan will not only help you pay off your debt sooner, but it will save you money on interest!
If you pay off your owed debt sooner, then you’re paying interest for a shorter period of time. Therefore, you’re paying less interest in total.
Let’s break it down with an example:
The average student loan debt per person is $35,000
The average student loan interest rate is 5.8%
Let’s say you’re looking to pay off your loan in 20 years
Your monthly payment comes out to $247 a month
With this example, you’re paying $24,280 just in interest
That’s insane. Not only is 20 years a long time to be struggling with debt, but knowing you’re paying $24,280 extra just in interest is awful. Your loans may have gotten you through school and into the career you dreamed of, but now you have this overwhelming number hovering over you for the next two decades.
Sure it is scary, but it’s not hopeless. Most financial advice you’ll receive starts with “pay off your debts first”. This is because debt holds you back from using that cash on other things you need in life like an emergency fund, bigger purchases, or even investing.
So how do you actually pay off a 20-year loan sooner?