One of the most prudent financial decisions you can make is to pay your student loans early. Compound interest is a powerful force when it’s working with you – and equally powerful when it’s not on your side.
However, it pays to be careful when putting extra money toward your loans. The way most programs are set up, you can end up squandering your payments and not saving as much as you want to.
When paying down a loan, you always want to pay down principal first. Principal generates interest, so the bank or creditor wants to keep it as high as possible. With student loans, extra payments often get applied towards future monthly payments, “for your convenience.” If you pay $500 per month, a payment of $1500 might just mean that your payments for the next three months are taken care of.
Instead of just sending extra money, make sure you include a note with your payment that you want the extra money to go straight to principle, and that you don’t want it applied to future payments. Legally, the creditor has to honor that request.
By doing so, you’ll maximize the impact of your investment and save yourself unnecessary interest payments. Allowing you to get out of debt fast.