A Student Loan Repayment Trick That Can Save You Money

It’s common knowledge you can save money by paying off loans and other debts quickly or ahead of schedule. You can also save money by making monthly payments as planned, if you put in a little extra effort and do the math.

The trick? You can change your repayment period to an extended plan (for example, a 25-year instead of a 10-year repayment period) but continue to pay the amount required to be debt-free within 10 years and request the extra payment go toward the principal balance. The amount you overpay reduces the interest you’ll pay over the life of your loan. Here’s where the extra effort is necessary: You should frequently follow up with your loan servicer and check your statements to make sure the extra payment is applied as you instructed.

Perhaps you’ve heard of this tactic — it’s particularly common among homeowners with mortgages — and wondered if it’s something you could do. A Reddit user recently posted about the strategy, saying, “Am I crazy, or can I actually save money by using the extended payment plan for federal loans?”

Not crazy. It’s a smart plan, you just need to make sure you know what you’re doing.

“That post is completely on target,” said Mitch Weiss, a finance professor at the University of Hartford. He frequently writes about student loan issues for Credit.com and has written about this strategy as a good way to save money but also give yourself flexibility. “You can always fall back on that lower payment when you need it. Managing your cash flow is in your hands, then.”

In the post, the redditor provided a good example. He pays $636 each month on a 10-year repayment plan, and the required monthly payment would drop to $333 a month for a 25-year repayment plan. By continuing to pay $636 a month, the extra money would go toward the principal balance on the loan with the highest interest rate (he checked with his loan servicer, and that’s its policy — you’ll want to check with your own servicer to confirm if this is its policy as well). In the event he can’t afford the $636 some months, he can fall back on the lower required payment, rather than having to go the servicer and explain the hardship and try and work something out (or make a partial payment and get hit with late fees or skip a payment and get a delinquency on his credit report).

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The redditor said he used a loan calculator and found that he’d pay off his debt two months faster and save more than $1,000 in interest that the loan would have accrued under the 10-year plan.

“Am I missing something here, or is this a no-risk way of saving $1,100 and 2 months? I mean it gives emergency flexibility AND saves me money?” he wrote.

As dozens of people replied (and Weiss confirmed), the math is correct, but when it comes to student loans, you need to be careful.

“It’s all about execution, and the way that you ensure execution is that you have your directions in writing and you follow up,” Weiss said. Tell your servicer exactly what you want them to do with that extra payment (put it toward the principal balance, and if there are multiple loans, the principal balance of the loan with the highest rate), and make sure they do it. Otherwise, they may take the extra payment as a future payment and just not charge you again until the prepaid amount runs out.

Another Reddit commenter said it took emailing his or her servicer every 48 hours for almost two months to make sure the servicer applied the payment as instructed. Weiss said he’s heard and read about that complaint a lot.

“It was a very constructive string of comments,” Weiss said. “I think this demonstrates how serious an issue this is for so many people and how so many people are taking this so seriously.”

As you pay down your student loans (no matter your strategy), it can help to keep an eye on your credit reports for any inaccuracies or problems that could drag down your credit score. You can get a free credit report summary, updated every 14 days on Credit.com, to track your progress as you get out of debt.