I’m sure it’s been discussed, but I had a question regarding paying off student loans. Son just graduated and has about ten thousand dollars worth of student loans to pay back. I know he will sign up to make monthly payments, but is he also able to make lump sum payments from time to time on the principle? If so, how does one do that?
Yes, he can. He needs to contact his lending agent to see how they want to accept those payments.
From my experience with the lenders servicing federal loans, any payment made above and beyond the amount owed per month will be applied first to any late fees (if there are any), then to the accrued interest, and finally to the principle. The interest is going to have to be completely paid down before the lump sum payments will be allowed to pay down the principle. If these are private loans, the answer the lender will give may vary.
Wow, Kgos, if that’s the case, and one cannot pay down the principle on these Federal,subsidized loans, no wonder students carry debt for so long.
Yes, unfortunately that is correct. The lenders have regulations they have to follow that dictate the interest must be entirely paid before you can move on to pay the principle. It won’t hurt to call the lender just to verify, but I am afraid you are going to hear the interest paid first regulation communicated.
Just an FYI: when talking about loans it is spelled principal.
Damn, I am pretty good at using correct spelling, too…but all these years and I never knew. Thanks for,the correction.
My fingers often type faster than my brain processes 
Many people confuse principle and principal – the good news is that everyone understands what was meant.
Although not part of the questions, also note that making a large payment does not erase the need to make monthly payments. I made the mistake of sending 3 to 6 months at once only to learn I had become delinquent on months that followed the payment. In my book, it is easier to set the payments on autopilot and save the money for a full payment when ready. Of course, it also depends on the interest charged and works better when the interest is very low.
^^ Well, that will happen if you want the entire amount sent applied to principal and not to future payments. You need to tell the loan servicer how to apply the funds. You also need to tell the servicer if you have several loans how you want the bulk payment applied. This is no different than if you pay an extra payment on your mortgage.
Say you owe $10k and the scheduled payment is $100/mo. You send the Jan payment in for $300. Did you want to pay Jan/Feb/Mar, or did you want to pay the $100 owed in Jan and then $200 toward principal? If you don’t tell the loan servicer, it will apply the funds according to their method, which will be to all accrued interest first, any fees and charges, and then either prepay the next few payments or to principal. If to principal, another payment is due Feb 1.
If you make any principal reductions, you may be able to get the loan re-amortized if you want to drop the payments, but often that can only be done once a year or even less often. If you don’t pay as scheduled but prefer to pay 3-4 months at a time, the amortization schedule may not work out exactly right. Interest accrues daily, so if you haven’t paid for 45 days, you’ll have 45 days of accrued interest not 30 and then making a single payment might not be enough to pay the accrued interest. It is really better to pay on the same day of each month.
@kelsmom can you weigh in on this?
I think the only cases where you will have some luck with an extra payment applied to the principal is if you call in the payment and give specific instructions or to mail in a check with the memo stated to apply to principal. Otherwise if you make an extra payment online on top of the monthly payment, it automatically will be applied towards the interest, as that is how their system will process it.
^^
Although I agree with the spirit, I can assure you that telling the servicer made no difference. The first time I did send several payments at once, I did NOT send in a request or instruction. I was simply trying to avoid paying while abroad for a long time. They applied the money correctly in month 1 and the entire amount to principal. No notices – no emails – no calls. I found out by getting a credit report alert. Discussed it ad nauseam and nothing changed, including the reports. Simply stated, they confirmed one needs to make regular payments.
To test the theory, I doubled two payments and asked them to apply to the next months? Result? The servicer promptly applied the entire payments to a principal reduction. There is no way to apply payments to the future. They have no escrow system. At least as far as I could tell.
Fwiw, this is not a small outfit or a local credit union. It is UAS servicing a Stanford loan. Since one has a better chance to have a dialogue with a pound of meatloaf than with the people working there, one’s sanity is preserved by keeping it simple. Hence, signing up for the autopayments AND checking the monthly debit.
Are you talking about federal loans, or private ones?
I am paying off one year’s worth of my daughter’s federal loans (unsub and sub). When I’ve made payments that are larger than the monthly bill, the amount has been taken off of the principal balance. They have not given me the option of having the excess amount applied only to the unsub loan (higher amount and higher interest, so I’d prefer to get that one erased), but split the excess amount 50/50,
My statements now come stating that no payment is necessary, because of the excess that has been paid, but reminds me that interest will accrue. I keep making payments.
Of course, my daughter just reminded me that I am dumb to make excess payments. After next year, all of her federal loans will be forgiven because she teaches in a native village in AK that is well below the poverty line. So perhaps I should pay interest only until they are forgiven or we catch up to what I’ve overpaid.
@xiggi That definitely seems true, for whatever reason the servicer of the loan wants that monthly payment. Also, signing up for auto-debit for the payment reduces the interest rate by .25% - so that is a bonus. My husband’s loans aren’t in repayment yet, so any payment I make so far the portion of the loan is returned since I am still within the 120 day disbursement period. The lender’s websites all say that interest needs to be paid down first, but depending who you speak to and have the payment processed by might get a different result.
All simple loans are paid by applying the payment to fees, interest, principal - your mortgage, your car loan. Principal is $10k starting Jan 1, so Feb 1 payment is $100, which is $90 in interest, $10 in principal. Next month, $89 in interest, $11 to reduce principal. If you pay $200 on April 1, $88 has accrued in interest so $112 reduction in principal. Skip May, but then say $85 in interest for April accrued (you lowered principal) and $85 in May, so if you only pay $100 on June 1 you don’t have enough to cover the interest. It is possible to do it as xiggi did and have the second payment put in suspense for a month and then released and applied the first of the next month, but it is also likely whoever is processing the payments will just send them through, and the computer will just apply the payment as a normal payment. If two payments are received, first pays fees,accrued interest, and then principal. For the second, there are no fees or accrued interest, so it is applied to principal. Much much easier to do steady, automatic payments.
You do have the right to have the payments applied as you direct to principal or to future payments, but the payments have to have special handling. If you think payments haven’t been applied correctly, file a complaint with the CFPB. If you are making payments on several loans to the same servicer, I recommend paying them all separately.
KKMama, I don’t think your subbed and unsubbed loans have different interest rates, unless one was a Plus loan taken by the student. If the loans have two different rates, they’d be two different loans with two different loan numbers and you can certainly pay them separately and pay more on the loan with the higher rate. Or, since you are planning for them to be discharged, have your daughter apply for IBR which will reduce the payments to the lowest payment (10% of her income), and then have them discharged.
Our son took out federal subsidized loans only. No private loans and none unsubsidized.
Xiggi, they seem to do that on some mortgage loans also, IIRC.
Some incorrect info in this thread.
like anything else in life, communication is key. My kids have successfully made extra payments on their loans, and have had the additional amount applied toward the principal of the loan with the highest interest rate.
CALL the loan processer, tell them you want to make a payment of X dollars in excess of the minimum monthly amount and have it applied to loan #xysjdnd or whatever, and ask them to tell you exactly how to do this. They should be happy to help you do this. With my kids, it really wasn’t much of a hassle and went smoothly.
In fact younger kid did this entirely on her own last week, without asking me for help at all. Wanted to get rid of the highest interest loan.
With all the recent changes in Stafford loan rates, and the different rates for sub and unsub loans (then toss in Perkins loans) those who have graduated in the past few years are likely to have half a dozen or more different loans with different rates. As someone posted above, each loan will have its own loan number.
Mortgage lenders to the same. From a practical matter, the above is true for prepayments to pretty much any simple debt (absent legal wording to the contrary): first applied to penalties/fees, then interest and then principal.