Borrower beware! (Student Loans)

Parents Forum
101

<p>One of the calculators that calmom had (hsh.com), stated that you could "see the effect of additional principal payments". I urge you to consider this carefully though, because I have closed a few times, and have always questioned and pressurized the lenders involved, in presenting every possible scenario, including paying a little extra every month, and every single lender that I used (Wells Fargo, GM, Merc.,Fleet etc) has said that the original amortization schedule would not be re-calculated, even though technically your principal was going down. And that all would happen is that your loan would get paid off earlier.</p>

<p>If anyone here can find a lender (and not an online calculator) who is willing to do this for you, and not have some other hidden fees, please let us all know.</p>

<p>I can also tell you that you should always check your closing documents for a prepayment penalty clause, which is unacceptable. (Basically that is slapping a penalty for early pay-off).</p>

<p>The last time we refinanced, I happened to be an employee of Fleet Bank, got 1/4% lower than the market, and no closing costs, and btw, from time to time lenders will offer the general public no costs/no points/no catch. You just have to watch for these wonderful windows.</p>

102

<p>DStark,
Take a $100000 loan for 15 years at 5%
Your monthly payment is $790
At the end of 15 years, you will have paid $42342 in interest</p>

<p>Take a $100000 loan for 30 years at 5.5%
Your monthly payment is $567
At the end of 20 years, you will have saved $53500 (the difference between the 2 monthly payments)
BUT, you will have paid out $88500 in interest, and now have the saved $53500 to pay off the principal balance, which at this point is about $52300.</p>

<p>If you can afford the extra $223 a month, the 15 year mortgage is better.
And if you get a windfall, or any kind of bonus money, you should not put it into your mortgage now, but only put it in at the point that you would be paying off your entire loan.</p>

103

<p>Chocoholic, the difference between the monthly payments only lasts 15 years. Then you are done with the 15 year loan. I see a savings of $42,140 over the fifteen years that is then lost over the next 6 years as you continue to pay the 30 year loan off. (I am not counting tax benefits).
Isn't that right?</p>

<p>I haven't done the calculations, but the savings of the 30 year after 15 years falls short of the balance still owed after 15 years.
You have saved $42,140 plus interest earned on that money during the 15 years, but unless you make more than the 30 year interest rate on that money, you fall short, right? </p>

<p>My guess is you don't fall way short, probably under $10,000.</p>

104

<p>You are right dstark, I did that while my 10-year old was reading me her poems, and was paying scant attention to both. The savings do stop at 15 years. Look, you are getting good at this :)</p>

105

<p>What Chocoholic and I are trying to get across is that your assumptions are incorrect. You can argue and present numbers all you want to support your position, however, you are starting from the wrong baseline.</p>

<p>You are in the wrong forest! If you are in the Stafford and PLUS, Consolidation forrest then your numbers are correct (mostly). If you are in the comforming mortgage forrest then you have mis-identified the ecosystem. What you think you is ivy is really poison ivy. You are not going to die from it. When you look around, the masses looks just like you, so you think this is normal. Me , I'm in this beautiful forrest that has only a few people offering each other exotic foods and drink. </p>

<p>On my earlier posts I have already stated what you need to look for and how to make the proper decisions.</p>

<p>Why have you not done the reference reading? They are primary source material. Chocoholic and myself work in the financial arena. The mere fact that the Staffords, PLUS,and Consolidation programs have a lot more disclosure than your mortgage ought to tell you something.</p>

<p>Continue using your assumptions and the results will cost you tens of thousands of dollars.</p>

<p>We have given you the key. Use the key to open the lock, that binds the chains that keeps you grounded.</p>

106

<p>Itstoomuch
You are too much!! Very funny indeed. Well, what can I say, I keep explaining this stuff to friends, family, etc, but.............Alas.....</p>

107

<p>I don't know... sounds kind of like "NETwork MARKeting" to me. Only the few have the key....</p>

<p>And "itstoomuch", if you really want us to read your articles and references, CITE YOUR SOURCES. It's all very well to be mysterious, and "I've got the secret truth" guruesque, but nothing I've read that you have written is earth-shattering financial advice.</p>

108

<p>Istoomuch -- I find your post about "assumptions" and being in the "wrong forest" very patronizing. YOU have a false assumption -- that the rest of us are stupid and don't know what we are doing with our money -- and yet you also posted something that is outright stupid, in my opinion. I don't mean to insult you, but you made a comment about insurance -- and as a lawyer, I can only shake my head at the "can't happen to me" attitude expressed in the decision to leave your personal assets exposed because you don't want to pay extra for insurance. It only takes one accident and one law suit to totally wipe out everything you have saved and owned over the years. You can save money on insurance by opting for higher deductibles - because most of us can safely assume the risk that we will have to pay $1000 or $2000 to repair a car - or even risk dropping collision coverage to repair or replace the vehicle all together -- but if there is an accident involving serious injury and you find yourself facing a judgment of $500,000 when you only have insurance to cover $25,000.... well, that is one hole you will never get out of.</p>

<p>I can see what your thinking is from another comment you made -- basically, you insinuated that if we've tied up all our money in a mortgage and then our daughter wants a big wedding, we'll be sorry we don't have the cash. To me, that illustrates the pitfall of your "hang on to the money" approach -- you are the type of person who would end up spending the money on something else that you wanted, rather than really "saving" it to pay off the mortgage in a lump sum down the line. So what you are really saying is: opt for the lesser payments to keep greater liquidity and enjoy a more comfortable lifestyle. </p>

<p>The problem is that a lot of things change over time. I personally would rather take an approach I see as safer, even if it costs me more money. You are more willing to take risks. Riskier approaches in finance do tend to offer the possibility of higher returns, and so your advice may work for many .... but it isn't the best path for everyone. </p>

<p>As far as your statement about loan disclosure, I'm wondering what planet you are on. There are probably 20-30 pages of disclosures that come with my mortgage, with all sorts of documents that need to be signed and notarized. The student loans had a one page form to sign, with virtually nothing explained -- for example, I could not find how the interest rates were indexed any where on the Sallie Mae site -- whereas the indexes for my mortgages were disclosed and explained up front. I do think that student loans/PLUS loans offer a lot more flexibility in terms of payment - which is one reason I opted for a small PLUS loan -- but deferring or extending payments always ends up costing more money.</p>

109

<p>If I told you the numbers, You wouldn't believe me.</p>

<p>Why are you getting so upset. If you don't believe me you don't. I am throwing out real and honest facts that as I said before are known, unhidden, commonly misunderstood facts that are available from all the sources listed below and through your financial institution, if you talk to someone above the clerk level.</p>

<p>for those who have a legal certification, I challenge you to take your information to your State Finance department, Your state Bar responsible for financial dealings. </p>

<p>I have already cited the sources. </p>

<ol>
<li>Federal Reserve Bank of Philadelphia. (See the consumer publications. Your tax dollars at work)</li>
<li>Frannie Mae and Freddie Mac </li>
<li>Any PLUS, STAFFORD, CONSOLIDATION FORMS, applications and Publications from any financial institution of your choosing.</li>
<li>The company that holds your mortgage. You may try the servicing company. Ask for someone of some responsibility. Ask them the direct question : Is my comforming mortgage a scheduled interest or simple interest loan.</li>
<li>For those who have a legal certification- is your specialty in finance or is it in something else. I would put forth that just because a person is a doctor in medicince, he is not a doctor of surgery.</li>
<li>Calmon: I am relating my experiences with various clients who wish to extinquish their loans faster and but at the same time do not wish to have various insurance programs in place. They then find themselves unable to work for what ever reason and consequently are unable to get a reasonable comforming loan because they are unable to maintain a job and have tied their wealth in equity that they can not access without substantial fees. I cannot help them because their comforming loan is very precise and because they had no safety need. </li>
</ol>

<p>I understand that things do change in life and that is why I have tried to get people to think at the alternatives. Since you are a lawyer, then you know that they are certain obligations in a contract. If you do not understand a contract, I would hope that your clients would consult a lawyer who is knowledgeable AND competent (in this realm-Finance). </p>

<p>Your mortgage papers may be 30 pages long but only the first page deals on how the mortgage is to be paid off. If you notice, it is very rare, that a mortgage will state how the loan is calculated. You can find how your PLUS, STAFFORD, Consolidated loan is calculated even on this COLLEGE CONFIDENTIAL BOARD. Do you not visit this board's sponsors or any other advertisers of student loans? If can make this plainer-Visit ANY student loan site or facility for a detailed explanation of the program. If you do not understand do not sign!.</p>

<p>Save your ire for something else.</p>

110

<p>Network marketing?</p>

<p>I have sited primary, direct sources. They have the keys. They have all the information that I have given you. My information is from them. OUR GOVERNMENT.</p>

<p>The laws, rules, and regulations come from them.
If you question what I have spoken, then question your government.</p>

<p>If you believe in your banks they are secondary sources. If you believe your broker, they are tierary sources. If I remember my technical writing course- you give primary sources. I have done so. I have not seen primary sources from others. (BTW, have you used different loan calculators and come up with different answers? Which one to believe? I have also gave you an example where I performed some of my kids math problems in his math book. I told you that I and the book got different answers. Both were right answers. The book started from an unstated assumption that I did not expect. I assume a typical payment schedule of 12 months. The book used 1 payment (which as not stated.) )</p>

<p>I told you up front that I am a heretic, but I speak the truth. I do not believe that anyone would believe me. A few do. Most Don't. That is why I gave you, up front, my sources for your own research. </p>

<p>If you do not do the research, becareful about glass houses.</p>

111

<p>an example of the terms of the loan stated that if you make "48 consequative payments." What does that mean to you? Please pause and answer.</p>

<p>I tried to lead people to another analysis. Some took it to be condensating. I do not mean to come across that way. If I gave you the answer right away- you wouldn't have learned. I want you to think! </p>

<p>In my own case, I look at it as "how fast can I (you) make those payments" without destroying our budget and afford me with the most options. Because the loan is a "simple interest" loan (you pay only what you owe) I opted for biweekly payments. What most people assume to be monthly payments (48 months) I made a different assumption which I made into fact by calling the lender and servicer to verify. I am saving myself a bundle. </p>

<p>Do NOT try this with your mortgage. Your typical mortgage is a conforming loan. (see primary sources listed in previous postings). There are strick written and unwritten conditions on a conforming morgage loan.</p>

<p>as always, as posted previously, Please consult with your Knowledgeable AND Competent people.</p>

112

<p>istoomuch -- I get ticked off by your "I've got a secret" attitude. "If I told you the numbers, you wouldn't believe me".... I think the truth really is that you are doing a poor job of explaining yourself. The numbers are pretty easy to figure out. </p>

<p>An amortization schedule is something that shows what the payments are, and the balance between interest and principle, for the term of the loan. The "term" is the contractual term - that is, if you have a 30 year loan, but want to pay it off in 15 years, the amortization will be calculated over the remaining term on your loan - and at least in theory that is going to mean that the 30 year loan is going to charge more interest.</p>

<p>However, I have now worked out this problem on half a dozen different amortization calculators - and they all yield the same result: if you prepay the 30 year loan by making monthly payments of the amount needed to make up the difference between the scheduled payments for 15 & 30 year loans, the end result in terms of principal and interest paid is equivalent. Why the math works out that way, I don't know.</p>

<p>There's a very good calculator with great visuals (charts) to show the effect of prepayments here:
<a href="http://www.partnersfirst.com/MortgLoanCalc.html%5B/url%5D"&gt;http://www.partnersfirst.com/MortgLoanCalc.html&lt;/a&gt;&lt;/p>

<p>There is an article that has a reasonably good - and simple - explanation about amortization here:
<a href="http://www.dignitymortgage.com/MortgageIndustry/AmortizationTerm.htm%5B/url%5D"&gt;http://www.dignitymortgage.com/MortgageIndustry/AmortizationTerm.htm&lt;/a&gt;&lt;/p>

<p>Prepayments reduce both the overall length of the mortgage (it is paid off sooner) and the interest charged. </p>

<p>Interest is always calculated based on the remaining balance of the loan; so if you currently owe $100K on your mortgage send a check to your mortgage lender today for $10,000.00 -- then with the next payment due the interest will be calculated based on the approximately $90K remaining principal balance. </p>

<p>The actual mathematical formula that does this is here:
<a href="http://www.ynot2day.com/TEMPLATES/PROJECTS/MATHEMATICS/APPLIED/FINANCIAL/LOAN%5B/url%5D"&gt;http://www.ynot2day.com/TEMPLATES/PROJECTS/MATHEMATICS/APPLIED/FINANCIAL/LOAN&lt;/a&gt;&lt;/p>

<p>The point of confusion may be with "payments" and "interest". The mortgage lender will NOT reduce the monthly payment because principal owed went down -- if you owed $800 a month and prepay an extra $200 a month -- and then 10 years down the line run short of money, that does not mean that your payment due will be less than $800 (unless you have an adjustable mortgage, where the payment IS recalculated whenever the rate changes).</p>

<p>If you have a 30 year mortgage for $100,000 at 5% interest, and you calculate what amortization would be for a 15 year loan, and then pay the diference each month as an additional prepayment - your out of pocket and overall costs will be very close to what you would get if you had negotiated a 15 year loan -- at the end of 15 years you would have paid about $144,000 total. If instead of prepaying monthly, you save your money in the bank - at the end of 15 years you will owe about $65,000 - if you pay that, your overall costs will end up at about $165,000. So basically, waiting until the end of the 15th year costs +$21,000. </p>

<p>If you have an extra $44,000 that you can invest, there is a good chance that you can do better than +$21,000, and come out ahead. But not so good of a chance if you have to build up that account with monthly contributions to savings. And if you don't make more on your savings, deferring the payments is going to cost you half again as much in interest as if you prepay. </p>

<p>Istoomuch -- the clients you talk about who are caught short when their circumstances change are those who planned poorly - they rendered themselves "house poor" by buying more house than they could afford, with payments that left them no room for other savings. I am certainly not advocating that. But it is just as likely that if they had opted for longer mortgages and lower payments that their situation would be worse: they would have the same financial reversal, would have spent their savings on something else that seemed important at the time --and they would have even less equity in their home. The problem with your logic is simply that you assume that they would have managed their money better if they had held on to more cash... but the reality is that cash in the bank is always a temptation. It is a lot easier to spend money that you have than money that you don't have.</p>

113

<p>From reading CC posts I find that most parents are trying to do the responsible thing in preparing for the future, kids education, etc.</p>

<p>I would imagine that for some of us who are early boomers are desprerately trying to bury a mortgage, fund college, and prepare for retirement. And as a nation we are trying to do a lot of things, too numerous to mention, with a limited budget and ballooning debt. </p>

<p>What I am trying to do, is to get people to look at things a little differently. Explore the alternatives, be a college kid again and be aware that there are "different strokes for different folks." </p>

<p>But there is one more efficient stroke. </p>

<p>I lament that everything is kinda overwhelming when it comes to money, And maybe some should just put me on "ignor". But money has its own language, its own rules, which we are do not teach very well. We teach future value in but one week in basic accounting II at the college level. Future value should be taught in high school and drilled into to kids until they understand that future value is also your mortgage, your student loan, Credit card, etc. Future value is what will be their future retirement, our retirement. IT is what kind of house they will have, how many kids to bring to this world, how to raise those kids. IT will be what type of nation we will have and what other nations will become. It is even how we will die. </p>

<p>The OP's article. Here is a lawyer, previously a smart student signed a contract. If you do not understand the contract and its future ramifications (future value) do not sign the contract. That goes for a mortgage, a credit card, and even marriage and having kids. (duck here) Ask for Knowledge AND Competent advice. Double check the answer. Then Triple check it.</p>

<p>reading reference: The Seven Laws of Money. by Michael Phillips.
Person Finance for Dummies, by Eric Tyson
The 9 steps to Financial Freedom, by Susoan Orman
( she has her own commentary on the laws of money)
(Orman has a series of popular books)
Rich Dad, Poor Dad, by Robert Kiyosaki with S. Lechter
(a series of books by Robert Kiyosaki with others)
Primary sources noted in previous posts, all from US<br>
Government agencies or sponsered agencies.
Primary source in each state concerning calculation of
interest.</p>

114

<p>I was stoned sooner than I expected.</p>

115

<p>question: if you are able to pay a one time additional sum of money towards a loan, and you were able to either decrease yr monthly payment amount still keeping the same number of total years of the loan but just less per month, or, decrease the number of years of the loan but keep the per month payment the same, is there a formula to determine which is better in terms of total less interest payable over the course of the loan?</p>

116

<p>Niji, look at the calculator I linked to in my post #112. It lets you specify a one-time prepayment at a specific point in the loan, as well as giving you options to calculate monthly or annual prepayments.</p>

117

<p>It is not a numbers thing. </p>

<p>It is getting late and I will examine your post later. </p>

<p>Let me say that you must understand that there are different ways to calculate interest, amortization, and payoffs. Please refer to Federal Reserve Bank Philadelphia, PAYING A LOAN OFF EARLY, Things you Should Know. Down load it and post it! I cannot be more explicit. </p>

<p>If you want the numbers first give me the assumptions that you working with.
Look at the publication that I referred to ( bit complicated in this pamphlet and best if you use a High School calculus text book) Count the number of variables. You can make any assumption you want, but I the Bank, reserve the but one rule- I, the Bank, make the rules.</p>

<p>Are you beginning to see how the game is played? The game is rigged if you want to accelerate a loan (mortgage) . If ask what is the monthly payment, what is the interest, you are giving ME, the Bank, permission to make the rules. If you don't ask you tacitedly give permission because you give ME, the Bank, permission to calculate a loan for you based on MY, the Bank's, rules and assumptions. </p>

<p>The only way that I have found to be an effective countermeasure is to simple ask how the loan is calculated and how extra monies are, not only applied to the loan but also how does that affect the interest. Anything else will leave you exposed. I know because I was snookered too, had a HALLALULA, and now play the game to my benefit and the detrement to the lender.</p>

<p>Again it is not a numbers thing. It is a rules game.</p>

<p>Your references are secondary sources. Give me primary sources.</p>

118

<p>Not enough information.</p>

<p>Here are some of the parts that must be present to answer.</p>

<ol>
<li>What type of loan is it? Mortgage, conforming or nonconforming. </li>
<li>Simple, scheduled, balloon, hybrid</li>
<li>Is it a installment loan, student loan, bank student loan, credit card loan, payday loan, revolving loan. </li>
<li>Is the loan in default?</li>
</ol>

<p>there are many other questions required to correctly answer your question You need to talk directly to your lender who is both Knowledgeable AND Competent.
Call your lender a couple of times. Ask the same questions. You could get different answers, I got different answers. why do you think I plea for everyone to besure you have Knowedgeable A-N-D Competent help. And DO YOUR OWN RESERCH if it means a lot of Money.</p>

119

<p>itstoomuch - it sounds like you got burned in the past by an unethical or disreputable lender. Maybe there was a prepayment penalty you weren't aware of? </p>

<p>The article you referenced says only one thing about mortgages:
[quote]
Actuarial Method
This method is most often used for mortgages and other loans in which a periodic rate is applied to a declining balance. It does not take into consideration whether a payment is made before or after the due date. Late payments are subject to a flat penalty, but interest does not continue to accrue.

[/quote]

<a href="http://www.phil.frb.org/consumers/establish.html%5B/url%5D"&gt;http://www.phil.frb.org/consumers/establish.html&lt;/a&gt;&lt;/p>

<p>That means that it won't help to pay down the mortgage faster to simply pay ahead of the due date -- as would be the case with a simple interest calculation -- but it doesn't change the fact that the interest is calculated against the declining balance. </p>

<p>The only "assumption" I am making is that most major lenders follow the same basic procedures. I do know that there are some pretty unscrupulous secondary lenders - companies that specialize in doing 2nd or 3rd mortgages, and prey on people desparate for money - that have some unscrupulous practices. I'm not talking about that situation -- those probably are not the sort of lenders that most of us would be dealing with when we finance or refinance. </p>

<p>Obviously it makes sense to ask questions -- but I have never had any difficulty getting answers to the questions. When going through refinancing I asked one lender with a someone unusual loan program to fax me a full amortization schedule -- they did.</p>

<p>I agree that there are many people who don't know what questions to ask. But I honestly don't find the process of getting answers all that difficult.</p>

120

<p>Knowing these little computer tricks is something I really don't want to learn or remember. I use to use carbon paper. Then I had use to use the CPM operating system. Then computers changed to DOS then to Windows. </p>

<p>One of the reasons why I changed professions is because the rules of money never changes. Learn the basics and you know it all. From the time money was invented until now, money concepts have not changed.</p>

<p>OK. The actuarial method is your standard, plain vanilla, everyday mortgage. In the trade called "conforming" loan. </p>

<p>Your STAFFORD, PLUS, and Consolidated loans are SIMPLE INTEREST METHOD.
Again, I urge everyone to look at the primary source that calmom has kindly linked to. People prepay their mortgage because they assume that the loan is SIMPLE INTEREST. The mortgage is an ACTUERIAL INTEREST. </p>

<p>When you look at the calculators you sourced and linked to; there is not enough information about the calculators, or the assumptions that the calculators and you make to have a high degree of confidence. That is why Chocoholic and I want you go forget the numbers, look at a different forrest, ignor the details and look at the overall scheme of things.</p>

<p>No I was not burned by unscruplous lenders. The lender(s) were well known lenders, national in scope, and provided the standard, fannie mae, freddi mac conforming loan. I just didn't understand the terms. I didn't ask!</p>