Is your student loan amortized? Yes, it is – as installment loans, all student loans are amortized. Amortization refers to the process of paying back a loan on a fixed payment schedule over a specific time period.

Student loans are a one-time loan, meaning they are not revolving and you can't re-borrow money that you have already paid back. Thus, they are amortized, meaning that each month a payment is made and a portion of that payment is applied to interest due, while another portion is applied to the loan principal. With each payment, the loan gets smaller. In the earlier years of repayment, a larger portion of the monthly payment is applied to the interest due rather than the principal.

Amortization Example

Student loans offered from organizations such as Sallie Mae or Discover are usually longer-term loans. For simplicity's sake, the below example assumes only a 60-month loan. Assume a $20,000 loan with a 5% interest rate that is repaid in 60 equal payments. The monthly payment amount is $377.42. In month one, the starting balance is $20,000 and the $377.42 payment is made. Based on the mathematics of the amortization, $294.09 of this amount is applied to principal and $83.33 is applied to interest. The ending balance on month one is $19,705.91. In month two, $295.32 of the $377.42 payment is applied to principal and $82.11 is applied to interest. The ending balance on month two is $19,410.59.

Slowly, the proportion of the monthly payment applied to principal increases and the amount applied to interest decreases. By month 60 in this example, the beginning balance is $375.86. During the month, $1.56 of interest is charged, bringing the amount due to $377.42 and allowing the entire payment to take care of the remaining balance.

Make Amortization Work for You

Amortization can discourage some student loan borrowers, because it means that more of each payment is applied to the interest due on the loan early in the repayment period. As a result, the balance, or principle, owed decreases slowly, making the borrower feel as if little progress is being made toward the repayment of the loan. In some cases, the borrower’s monthly payment may not even cover the amount of interest due – this is known as negative amortization, and it can cause the balance of the loan to increase rather than decrease.

Borrowers who experience negative amortization may still be able to qualify for student loan forgiveness through the Public Service Loan Forgiveness program. Borrowers can avoid negative amortization, and pay off their student loans faster, by paying extra each month or making extra payments. When doing this, however, it’s important to specify that excess payments be applied toward the principle of the loan.

Student loan amortization can make it seem like you’re not making any progress in paying off your loan. But amortization is normal for installment loans like student loans, auto loans and even mortgages. Pay extra on your loans to reduce your principal faster, and avoid negative amortization.