What Is Student Loan Amortization?

Written by: Kristyn Pilgrim
Updated: 2/25/20

Americans carry more in student loan debt than any other consumer debt category except mortgages. In 2019, 45 million student loan borrowers collectively owe over $1.5 trillion in student loan debt. This amount surpasses both auto loans and credit card debt. 

Student loans are based on a fixed payment plan. What this means is that you have one lump sum per student loan that you are paying off, and you will pay the same amount every month throughout your entire loan term. Your loan has a loan amortization schedule. 

You will usually start out paying higher amounts of interest before paying down your principal loan amount. The longer your loan term and lower your monthly payments, the more interest (and money) you will pay over time due to amortization.

By paying down your loan faster and earlier, you can put more money toward your principal balance and save money in the long run.

Understanding Amortization

There are two main types of loans: those involving revolving credit and those involving installment credit. With revolving credit, you can keep borrowing up to your line of credit, which impacts your monthly payment and the amount of interest versus principal you will pay. Credit cards are an example of this. 

With the other type of debt, installment loans, you have a fixed amount that you will pay down monthly. Student loans are installment loans.

With an installment loan, you pay the same amount of money each month over a set amount of time, with a designated end date. There are two aspects of your payment:

  1. Principal loan amount
  2. Interest

Your principal loan amount is what you borrowed to pay for school. Interest accrues over the life of your loan. You will pay more in interest early on in your repayment period and more on your principal toward the end. This is called an amortization schedule

All student loans are amortized since they are installment loans based on a fixed repayment schedule.

Calculating Amortization

To understand amortization, you need to consider these:

  • Principal amount of your loan (its value)
  • Interest rate and annual percentage rate (APR), which accrue during the loan term
  • Loan term (duration of the loan)
  • Repayment plan (monthly payment amounts) 

Every month, you will pay the principal and interest on your student loan. Since your monthly payments are fixed, you will pay more interest early on in your loan and more principal later on. Your money first goes toward paying off the accrued interest each month; then, the remainder of the payment will go toward your principal balance.

You can use a free student loan calculator to determine the amount of interest and principal you will pay over the life of your loan and what your monthly payments will be.

An amortization schedule determines how much interest versus principal you will pay and when. 

Sample Amortization Schedul

To calculate your student loan amortization schedule, you will need to know your loan amount, interest rate, monthly payment total, and loan term. You can use this amortization calculator as a tool. 

A sample amortization schedule for a $30,000 student loan with an interest rate of 5% and a 10-year repayment plan can look like this:

  • First payment: $125 in interest and $193 in principal, with a remaining balance of $29,807
  • 10th payment: $118 in interest, $201 in principal, with a remaining balance of $28,031
  • 25th payment: $105 in interest, $213 in principal, with a remaining balance of $24,921
  • 50th payment: $81 in interest, $237 in principal, with a remaining balance of $19,285
  • 75th payment: $55 in interest, $263 in principal, with a remaining balance of $13,032 
  • 100th payment: $27 in interest, $292 in principal, with a remaining balance of $6,094
  • Final payment: $1 in interest, $317 in principal, and no remaining balance

As you can see, the interest payments go down over time as you start to pay down more of your principal balance.

Negative Amortization

Your monthly payments can change if you are enrolled in an income-driven repayment plan. These plans work with how much money you are making to determine how much you can afford to pay each month. This can sometimes mean that you aren’t making big enough payments to cover your accrued interest for the month, which can result in what is called negative amortization.

Interest can keep accruing, and you will not be paying down your principal at this point. This can result in paying a lot more over the life of your loan, and it taking significantly longer to pay it off.

With some income-based repayment plans, such as those involving federal subsidized student loans, interest will not accrue during a set period of your loan term. This can give you a chance to catch up and pay it down. The faster you can pay down your loan principal amount, the better.

Managing Amortization

To avoid negative amortization and minimize the money you will pay on your loan over the entire loan term, there are some things you can do.

  • Choose a shorter repayment schedule. By having a shorter loan term, you will pay off your loan faster and pay less interest in the long run. Spreading out a loan over 20 to 25 years as opposed to 10 years, for instance, means you will pay more in interest over the life of your loan.
  • Pay off your loan early. The faster you can pay off your loan, the better. This means you will pay less money overall. Be sure to check with your lender to be sure your loan doesn’t have penalties for paying it off early. If it does, find out what they are and if it will be worth it anyway.
  • Pay extra money toward your principal each payment. If you are paying more than the minimum each month, you will usually need to let your lender know that you want this money to go toward your principal loan amount and not toward interest. This can pay your loan off faster, and your loan will accrue less interest.
  • Make loan payments automatic. Many lenders will give you a discount if you enroll in autopay. By enrolling, you can ensure that your payments are made on time every month. You can even set it up to take out extra money – just be sure your lender knows you want anything extra to go toward your loan principal. 
  • Consider the debt-avalanche approach to paying off multiple loans. With the debt-avalanche approach, you will pay the most money on your highest interest loans while making minimum payments on the others. You’ll then pay the high-interest loan off first, saving you money over time. 
  • Refinance your loans with caution. Through refinancing, you can often get a lower interest rate, which can save you money. But refinancing may make you ineligible for federal loan forgiveness, forbearance, and deferment plans. It can also increase your loan term, which can extend the amount of time it takes to pay off your loan instead of shortening it.

Loan amortization is automatic with student loans. With these tips, you can make it work better for you and, hopefully, save some money.