Student Loans: What is the Difference Between a Principal and an Interest Payment?

Updated  June 23, 2022

If you’re planning on going to college, you should be prepared for potentially high costs. The average cost of tuition and fees at a public four-year university for an in-state student is $10,338, while it’s $38,185 at a private school. 

While those numbers are pricey enough on their own, financing can add to the expense. If you borrow money to cover the total cost of attendance, you’ll end up repaying more than you initially borrowed because of interest charges — what lenders charge you in exchange for lending you money. 

When dealing with student loans, it’s important to understand how student loan interest rates affect your repayment and how your extra payments are applied to your debt. 

How Student Loan Interest Rates Affect Your Loan Balance

Student loan interest rates can cause your loan balance to grow over time. The higher the rate, the more interest that accrues. 

For example, if you took out $30,000 in student loans and qualified for a 10-year loan at 4% interest, you’d pay $6,448 in interest charges on top of the $30,000 you borrowed. 

But if you qualified for a $30,000 loan at 5% interest — a difference of just 1% — you’d pay $8,184 in interest charges. The extra percentage point would cause you to pay over $1,700 more in interest charges. 

However, you can cut down on interest payments by paying off your debt ahead of schedule. When you pay off your loans early, less interest accrues over your loan’s life, allowing you to save money. 

The Difference Between Principal and Interest Payments

When you enter into repayment, your loan payments cover two different aspects: 

• • Interest: Interest that has accrued to date
  • Principal: The original loan amount

When you make a payment, lenders typically apply the payment to any fees first, such as late fees or returned payment fees, then to interest charges. If any money is left over, they will apply the excess to the principal balance. 

Education Loan Finance Student Loan Repayment Options

If you take out private student loans from ELFI*, you can choose from the following repayment options: 

• • Immediate repayment: You make payments toward the principal and interest right after disbursement
    • Best for: You’re working while in school and can afford the payments. You want to pay the least amount of interest possible. 
  • Interest only: While you’re in school, you make payments that only cover the interest that accrues on the loan. 
    • Best for: You can’t afford to make full payments, but you want to minimize interest charges. You’re working part-time or have some income while in school. 
  • Partial payment: With partial payments, you make a flat-rate payment — typically $25 — while you’re in school. 
    • Best for: Money is tight while you’re in school, but you want to chip away at some of the interest that accrues. 
  • Fully deferred: If you opt for fully deferred repayment, you don’t make any payments at all while you’re in school. This is the most expensive repayment option, as more interest accrues over the life of the loan. 
    • Best for: You are in a rigorous academic program and need to completely focus on your studies, so you don’t want to make any payments while in school. 

Use the private student loan calculator to see what your payment would be and how much you’d repay over the life of the loan under each repayment plan.* 

Student Loan Repayment Strategies to Pay Off Your Debt Faster

Once you graduate, there are ways to accelerate your debt repayment and reduce the amount of interest that accrues. 

1. Make Extra Payments

If you want to pay off your debt faster and are thinking about different student loan repayment strategies, consider increasing your minimum monthly payments. 

More of your payment will go toward paying down the principal each month, reducing how much you’ll pay in interest and allowing you to pay off the debt ahead of schedule. 

For example, if you had $30,000 in student loans at 5% interest and a 10-year repayment term, your monthly payment would be $318 per month. If you only made the minimum payments, you’d repay a total of $38,192 by the end of your loan term. 

If you increase your payments to $368 per month — an addition of just $50 per month — you’d pay off your loans 20 months early. And, you’d repay just $36,731. By adjusting your monthly payment, you’d save $1,461. 

2. Use the Debt Avalanche or Debt Snowball Methods

If you have multiple student loans, consider using either the debt avalanche or debt snowball method to tackle your debt. 

With the debt avalanche method, you make extra payments toward the loan with the highest interest rate. 

With the debt snowball, you target the debt with the lowest balance first. 

Which is best for you? It depends on your goals and personality. Learn more in our breakdown of the debt snowball and debt avalanche method repayment strategies. 

3. Refinance Your Debt

Student loan interest rates have a big impact on your overall repayment. By refinancing your student loans,* you can qualify for a lower interest rate so more of your monthly payment goes toward the principal. Over time, refinancing can help you save a significant amount of money. 

The Bottom Line

By understanding how payments work and how student loan interest rates affect your total repayment, you can pick a repayment plan that works for you. 

If you still have questions, ELFI’s Personal Loan Advisors can walk you through the loan application process and answer any questions you have.*

*Subject to credit approval. Terms and conditions apply.

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