When you pay extra on a federal student loan, where does the money go?

Summary

Unless you owe late charges or other costs, each federal student loan payment covers the interest that has built up by the day it arrives, and whatever is left reduces principal. Edfinancial, one of the Education Department's servicers, sends anything above the amount due to your highest-rate loan unless you tell it otherwise, and moves that loan's due date forward. On the Repayment Assistance Plan, extra money goes to interest first, so it can cancel out part of the interest the government would have waived and the $50 principal match it would have added.

Interest first, then principal

Education Department rules set the order inside each loan:

No late charges or other costs owed: outstanding interest as of the date the payment is received, then principal.
On RAP, with charges owed: interest, then late charges and other costs, then principal.
On the Tiered Standard Plan, with charges owed: late charges and other costs, then interest, then principal.

The charges case rarely comes up. Edfinancial notes that the department does not assess late fees on loans it owns.

Your extra dollars go to your most expensive loan

Before any of that happens, the servicer decides how much of the payment each loan gets. Edfinancial groups loans that share a type and rate. If you pay exactly the amount due, every group gets its own share. Anything above that goes to the group with the highest rate. When two groups have the same rate, unsubsidized loans come before subsidized ones, and extra money on a consolidation loan goes to its unsubsidized portion. A payment that falls short is spread across the loans that are furthest behind.

Overpaying also moves the due date. Each time the extra money covers one regular monthly payment for a group, that group's due date advances a month. Say one group bills $80 a month and $300 of extra money lands on it. That covers three regular payments, so its next three statements show $0 due, and skipping those months does not make you late. Interest keeps accruing on the principal the whole time.

You can tell Edfinancial to do it differently, once or on every payment. You can ask it to advance the due date by only one month, to spread the overpayment across every group, or to put the money on a loan you pick. On an income-driven plan, the due date cannot move past your yearly recertification date, and a borrower with a $0 payment cannot pay ahead at all.

Payments in the first 120 days

Money paid within 120 days after a loan is disbursed to your school goes entirely to that loan's principal. Edfinancial treats it as a loan cancellation, dated back to the disbursement date. The origination fee is recalculated on the smaller principal, and less interest accrues from then on.

Paying more than the RAP bill

RAP waives the rest of a month's interest when your full, on-time payment does not cover it. And when your payment knocks less than $50 off principal, the Education Department tops the reduction up to $50 (or up to what you paid, for payments under $50).

The department's own example is a single borrower earning $45,000 with no dependents. The RAP bill is $150, $40 of interest is waived, and the match is $50, which puts that month's interest at $190. Here is what happens if the same borrower sends $250 instead.

	Pay the $150 bill	Pay $250
Interest paid by you	$150	$190
Interest waived	$40	$0
Principal paid by you	$0	$60
Principal match	$50	$0
Principal reduction	$50	$60

The extra $100 buys $10 of additional principal reduction. The department has said it will publish more on how the subsidy and the match work when a borrower pays more than the amount due.

Sources

Written by Kaz (pen name). Figures are copied from the sources' published pages on the dates shown. We have not used these products. Corrections: contact form.