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How Much of Your Loan Payment Should You Allocate to Principal and Interest?

The U.S. Department of Education has extended a pause on student loan collections and interest rates for the current fiscal year. The pause will apply to all defaulted loans in the Federal Family Education Loan (FFEL) Program. The pause is meant to protect borrowers during this time, which is critical since many Americans are already facing financial hardship. The pause will allow borrowers to pay their loans and avoid defaults, while the economy improves and the number of COVID cases declines. President Biden’s decision to extend the pause was made in response to the ongoing pandemic and a need for responsible phase-down of relief.

The payments made to the federal student loan are in two parts. The interest accrues each day, and payments are allocated first to the interest, then the principal. This method may vary slightly depending on the number of days between payments. However, the principle balance of the loan will always be higher, so extra payments are encouraged. In addition to monthly payments, extra funds can be used for various purposes, including consolidating loans. The following information is intended to help you make informed decisions about how much of your loan payment you should allocate to principal and interest.

Congress should direct the IRS to share relevant borrower data with the Department of Education to avoid duplication and error. Such a move would ensure the accuracy of the borrower’s information and help speed up the entire loan repayment process. Further, the pause would decrease the number of errors that occur in the application process. And in addition to the relief for borrowers, the pause would protect taxpayers from further delinquency and save money mezoka.

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