Comments on: Please help me better understand repaying my student loans.

Question: Please help me better understand repaying my student loans.

4ster — Sun, 06 Jul 2008 11:11:05 -0800

In 1997, I started making student loan payments, five months after graduating from graduate school. Shortly there after, in a sudden moment of sheer, blinding stupidity, I consolidated my loans, reducing my monthly payment and doubling the term of my loan. I do not want to make payments for 10 more years, however, I cannot figure out how to calculate the money I would save py doubling my payments this November.

Arithmetic has never been one of my strengths. I've tried plugging numbers into various online loan calculators, but the numbers don't seem right.

So here goes (I don't know if this is enough information or not:

Monthly payment: $262.51
Original principal balance: $31,298.40
Capitalized interest: $0.00
Outstanding principal balance: $14,953.18
Accrued interest: $121.18
Total amount outstanding: $15,074.36
Interest rate is 8%

What started this all was making a double-payment of $520, and discovering that $449 went to principal, when only $139 of a $265 payment went to principal.

So could someone help me understand how much money we will save by doubling all our payments starting in November, and how to figure this out in the future? If your answer is how to better use an online calculator or just a mathematical formula for figuring this out, I'd appreciate.

Having this kind of information will be great inspiration to stick with it, especially in a couple of months when I'm posting questions like, "Does anyone know some good Ramen Noodle recipees?"

Thanks.

By: iamabot

iamabot — Sun, 06 Jul 2008 11:36:56 -0800

You need to contact the loan company and requst that overpayment goes to principal.

This will not be foreign to them, but it's to your advantage to have overpayment applied to principal owed, and it's to their advantage to have overpayment go to interest.

You can essentially look at an online mortgage calculator that provides details on extra principal payments.

By: Forktine

Forktine — Sun, 06 Jul 2008 11:51:51 -0800

This is actually a mortgage calculator, but works fine for most other loans, too. I like how you can put in all kinds of combinations of extra payments -- one-offs, extra every month, etc -- with start and stop dates.

Putting in your figures, and starting a monthly extra payment of $260 in month #120 (ten years into the loan) provides a savings of just under $6,200 and shortens the loan repayment by six years, according to the calculator.

So yeah, worth it, assuming your financials are otherwise in order, and assuming that these figures check out.

By: cdmwebs

cdmwebs — Sun, 06 Jul 2008 11:54:55 -0800

Plugging your information in here says you'll be paid in full by September, 2010 and you'll save roughly $5000. The $5000 is an estimate based on ten years remaining on the original loan.

On preview, what Forktine said.

By: cdmwebs

cdmwebs — Sun, 06 Jul 2008 11:57:33 -0800

Whoops. I used the $449 as the extra payment. At $260, the new date came to September, 2011.

By: Forktine

Forktine — Sun, 06 Jul 2008 12:29:37 -0800

Iamabot is right -- you will need to tell your lender to put the extra towards principal. How you do this depends on the lender -- sometimes they send you extra payment stubs that you can use, sometimes you have to write a letter each time, sometimes any extra you send is automatically added to principal. Just find out their rules, and faithfully follow them -- it is usually not difficult, and if you are doing automatic payments already you can usually set up the extra payments automatically, too.

By: Perplexity

Perplexity — Sun, 06 Jul 2008 12:37:03 -0800

I don't understand the answers so far. Isn't it clear from the two example payments given by OP that the excess payment is already going to principal?

By: Big_B

Big_B — Sun, 06 Jul 2008 13:18:07 -0800

I just sent you an excel spreadsheet that I use to calculate amortization on all of my loans. Check your email.

By: Waitwhat

Waitwhat — Sun, 06 Jul 2008 16:06:12 -0800

CNN has a debt calculator that allows you to adjust the amount you might pay per month or to set a time frame for paying it off.

By: cdmwebs

cdmwebs — Sun, 06 Jul 2008 16:37:41 -0800

Perplexity: Yes, it is. The OP asked how much would be saved in interest.

So could someone help me understand how much money we will save by doubling all our payments starting in November, and how to figure this out in the future? If your answer is how to better use an online calculator or just a mathematical formula for figuring this out, I'd appreciate.

By: cabingirl

cabingirl — Sun, 06 Jul 2008 17:36:57 -0800

I don't understand the answers so far. Isn't it clear from the two example payments given by OP that the excess payment is already going to principal?

As cdmwebs said, yes. But I think you should still specify that you want it applied to principal. Maybe that's their default, but sometimes the default is to use the overpayment as credit towards a future payment, which is not the same thing. It's just good general advice to specify how you want it handled.

By: ethnomethodologist

ethnomethodologist — Sun, 06 Jul 2008 19:00:40 -0800

I was in almost the exact same boat as you- I left grad school in 93 and started repaying, also with a 20-yr consolidation, when my post doc ended in 1995 but I also got a 1-yr forbearance in 1997 when I emigrated to Canada. I also had about the same amount of loans as you do. Interesting.

Anyway, as of April 2006 with windfall from a sale of an investment property I paid the balance off, about $20,000(US), 10 years ahead of schedule. What I learned was that it does not matter if your overpayment goes to interest or principle- initially (I'd been overpaying for about two years before I lump-summed it) it mostly went to interest; it later went to principle, but in any event I saved a TON of money paying off early. Don't worry too much about it, just pay more than you're scheduled to and it will work out in your favour one way or another.

By: BrotherCaine

BrotherCaine — Mon, 07 Jul 2008 02:45:28 -0800

Talk to an accountant (IANAA), or find a student loan interest calculator that asks what your AGI and tax rate are. If you live in the US, the first five years of student loan interest are often tax deductible as an adjustment to income (not Schedule A). It may be optimal to invest the extra money until you no longer get the deduction.

By: GarageWine

GarageWine — Mon, 07 Jul 2008 09:14:37 -0800

From the numbers you gave, you have 73 payments at your current monthly payment.

If you doubled your payment today, you would have only 32 more payments. If you start in November, you will some slightly more than 32 payments. My guess is approximately 36 payments. If you have Excel, use the NPER to calculate the number of periods. If you want to know precisely, then you have to do the following:

1. Count the number of payments between now and November. Write that number down.
2. Use the PV function in Excel to determine the outstanding balance in November.
3. Use the NPER function in Excel to calculate how many more payments you need to make from November forward (using the now-doubled amount for PMT).
4. Add the results from #1 to #3.

Or, you can trust my estimate and say that you've got a little less than three years to go if you double your payment in November.

By: 4ster

4ster — Thu, 10 Jul 2008 08:11:45 -0800

All,

Thanks so much for your responses, and a big thanks the Big_B for the spreadsheet. We're going to print this thread and post it around the house to keep us motivated. You guys are the best.