How student loan amortization works

Loan amortization is the process of paying interest and principal on a loan over a fixed time period.Your interest is calculated as a fixed percentage of your remaining balance, so to keep payments even, your initial payments are directed more toward interest than paying down the principal.As time passes, more of your payment goes toward paying the principal until the loan is paid off.Seems like pretty simple math — and it was until the decade after the Great Recession saw an explosion of student loan borrowing and the growth of negative amortization of student loans.Before we get to the latest developments in student loan repayment policy, it’s important to understand how we got here.Amortization refers to the process of paying back an installment loan, such as student debt, with fixed payments over a set period.

Many student loans are amortized over 10 years and require fixed monthly payments. Depending on your loan, though, you might have a longer or shorter repayment period.As you pay back your debt, a part of each payment goes toward paying down interest charges, and the rest goes toward reducing your principal balance. “In a typical amortization schedule, a borrower’s monthly payment covers all of the accruing interest each month along with some principal, so that the overall balance gradually goes down over time until the loan has been paid in full by the end of the repayment period,” according to Adam Minsky, a student loan lawyer.When you’re shopping for a student loan, whether public or private, the lender will show you an amortization schedule to give you an idea of how much you’ll have to pay each month.

Here is an example of a five-year amortization schedule for a $1,000 student loan at 6% interest.(You can check your own details with a student loan calculator.)You can see in the table that payments on interest go down and payments on principal go up over the life of the loan.

Over five years, you pay a total of $1,160, which is the o...