Comments on: How do I pay off large chunks of my school loan and avoid any interest trickery?

Question: How do I pay off large chunks of my school loan and avoid any interest trickery?

wolfkult — Fri, 29 Feb 2008 13:42:57 -0800

How do I pay off large chunks of my school loan and avoid any interest/payment trickery?

I want to pay 10k on my 30k loan.

In the past whenever I'v made a payment larger than what is required ($230) it just makes the next month's bill lower or nonexistent. For example, when I pay $300 it just makes the next payment $160. When I pay double (460) it makes my payment the next month 0. I don't want to pay 10k and just have my next 50 payments paid for.

Someone told me once to put "apply extra toward principal", well I did that and the same thing happened so I really don't know what to think. I've been putting this off for a long time but with the rate drop on high-yield savings it doesn't make any sense to not pay off my school loan (4.7%).

Maybe I'm worrying for nothing? I don't know much of anything about loans. This is the only loan I've ever had.

By: iknowizbirfmark

iknowizbirfmark — Fri, 29 Feb 2008 13:55:05 -0800

You should contact your lender and ask about making a payment to pay down the principal of your loan. If it's a federal loan, start here. You can't necessarily just write something on the check, you may need to use a special form or send the payment to a specific place.

Your 4.7% interest rate is still reasonably low, though, so you really may want to keep that cash around to have a rainy day fund or even consider investing it in something that may pay you more than 4.7% after taxes (although that will carry risk with it). And you should definitely fund your IRA/401k or other tax-advantaged investments before you pay down student loans. You will probably never be able to borrow money at such a rate again.

By: 45moore45

45moore45 — Fri, 29 Feb 2008 13:58:36 -0800

Call your lender and have them apply that to your principal loan balance. They are cheating you if they aren't following your directions. Each payment has a hefty chunk dedicated to interest. If you send them a whole other payment amount to apply toward principal, that will save you paying interest on that amount for the life of the loan and that can really add up. Go to www.dinkytown.net to see their loan payoff calculators. There are over 250 free financial calculators on that site and it is worth it to play around with different scenarios to see how to get more bang for your buck. When you first start making accelerated payments toward prinicpal it doesn't look like much, but it really will save you a lot. I have been making accelerated payments on my mortgage and I will save over $37,000 of interest on the loan and get it paid off 21 years early.

By: Hermes32

Hermes32 — Fri, 29 Feb 2008 13:59:00 -0800

I called my student loan company and they told me that for them, the magic words were "do not advance payments." They also had an alternate address for advance payments. I recommend calling your loan company, because they may have different procedures for allocating payments.

By: EatenByAGrue

EatenByAGrue — Fri, 29 Feb 2008 14:55:49 -0800

Keep in mind that even if they don't advance your payments, they may simply be chopping off payments from the back end. If this is what you want, fine. Otherwise, you might want to ask them if they can re-calculate your monthly payments over the lifetime of the loan based on the new, lower principal amount.

By: milqman

milqman — Fri, 29 Feb 2008 16:22:41 -0800

As a side note, you never have to pay the exact amount on the bill. You can always pay more. If you pay 10k now, you're right, that means you won't receive bills for a while. But you can still pay. Just pay the same amount (some amount greater than your normal bill) every month, regardless of what is due (or when).

Then, if for some reason you come upon really hard times, you have some amount of leeway while you deplete that buffer. Ideally, you never do, but it is there as an out if necessary. Their stupid coupon book means nothing, all you need to see is that your payment is not larger than the balance of the loan.

Good luck!

By: rkent

rkent — Fri, 29 Feb 2008 17:30:27 -0800

Keep in mind that even if they don't advance your payments, they may simply be chopping off payments from the back end

Yeah, just to be clear, it always works this way - either your next several payments are chopped off, or the last several are. I'm pretty sure that the loan company is never "screwing" you into paying additional interest when you pay it ahead of time. In fact I think they might even be doing you a favor by letting you put the regular payments off for several months or years - time value of money, and all.

What happens when you start repaying a loan and get on a payment plan is that the entire amount due, principal AND interest, are "amortized" into 36, 60, 120, or however many equal payments. The amount of interest or principal you're repaying in any given month is really a mathematical fiction, mainly of interest to tax attorneys, as long as you stick to the plan.

However, when you make an over-payment, the plan changes. The amount of principal shrinks; hypothetically, you could re-calculate the whole payment scheme and reduce your monthly payment over the remaining months (like with a credit card), but generally this is not done. On one level, it would be easy, these things are all in spreadsheets these days and so it could even be automatic. I suspect the reason it's not done is that they've budgeted a certain amount of income per month/quarter/year, and it messes with their forecasts to have you paying differently. So they keep the monthly figure the same - and instead remove payments, either now or later.

If you're curious, there is WAY more discussion of loan amortization in this blog post, if you really want to get into the nitty-gritty. Just replace "mortgage" with "student loan" and it should be clear how that post applies to your situation.