"3. How loan holders apply your payments: The government regulates the way loan holders apply your payments. When loan holders receive your payment, they must credit your funds in the following order: first, they pay any fees associated with the loan, such as late fees; second, they apply funds to the interest that has accrued to date; third, any remaining funds go toward the principal of the loan.
Here’s a quick example to illustrate how this works. Say you have a $1,000 loan at 5 percent interest placed on a standard 10-year term, with payments made approximately every 30 days.
Day one, you have $1,000 in principal and $0.14 interest. Day two, $1,000 interest and $0.28 interest and so on until day 30, when you have $1,000 principal and $4.20 in interest. On day 30, the loan holder receives your $50 payment. You don’t owe any late fees, so first they pay off the interest that has accrued and the remaining $45.80 goes toward the principal.
So, now your principal is $954.20 with $0 in interest. That means the principal balance is lower, so you’ll only accrue about $0.13 in interest per day going forward."
Net answer: Extra payments are always good. The extra payment will first pay any accrued fees and interest, and then will reduce your loan payment. Your “Next Payment Due” date may be pushed into the future, but as long as you keep paying, the loan will keep shrinking faster than scheduled.
Good example, @arabrab. I didn’t have the time or patience to sit down and spell it out as such. However, making extra payments on any loan is always good, as you will pay less interest over time, and obviously, pay the loan off sooner. As mentioned by prior posters, certain lenders may have some quirky payment application methods (which you should understand before making extra payments), but most loans will operate as spelled out above. Best to call your servicer to confirm prior to making a payment.
Payments will be applied within federal guidelines for student loans. In the OP’s situation, there are only sub loans, but they may have different interest rates. In that case, the borrower may want the lump sum to be applied to the principal of a particular loan. I encourage borrowers to contact the servicer directly to find out how to do this, and to pay the money by check, with a notation on the memo line, accompanied by written instructions (and referencing the call to the servicer, including the date and the name of the person with whom the borrower spoke). Some servicers are better than others … always be sure to log back into your account to make sure it was done the way you wanted it to be done.
Yes, if you pay a lump sum, you may end up in a paid-ahead status, but you may not, as has been noted, depending on the amount. Never assume anything - you’ll be able to see when the next payment is due in your online account.
A note of caution if you are enrolled in Public Service Loan Forgiveness: If you pay extra and end up in a paid-ahead status, any payments you make during the months you are paid ahead will not count toward your 120 payments for forgiveness. If your payment is $100 but you paid $450, you might be paid ahead 3 or 4 months … but it only counts for one month … and if you pay during those 3 or 4 months, those payments do not count toward the 120 (because they are considered optional payments). I strongly encourage my students to pay extra whenever possible, so I was upset when I learned about this. There is a way around it: If you pay extra, contact FedLoans (they do all the PSLF servicing) and tell them that you do NOT want to be placed in paid-ahead status; do this every time you pay extra. I have been assured by FedLoans that this will allow your subsequent payments in what would otherwise be considered non-qualifying payment months to count toward the 120 payments. Of course, I would check to make sure they did what they were supposed to do.
I would say it depends on the servicer regarding extra payments. With sallie mae(now Navient) when we sent extra money it just paid us ahead so maybe we didn’t have a payment due the next month, etc.
I think that some of this discussion is more complicated than in needs to be.
Unpaid interest and fees are added to the loan balance – so there is no advantage to the lender to pay down “principal” without first paying down accrued interest and fees – the interest is charged on total outstanding balance. That is, once the interest & fees has accrued, it is essentially incorporated into principal. And whatever amount the borrower pays in excess of accrued interest + fees will always be applied to the loan balance (i.e. principal).
The issue about being in paid ahead status is important to be aware of – but if the intent of the borrower is to accelerate paying down the loan - for example, by paying more than the minimum due each month – the borrower will get the same benefit in the long run no matter how the lender books the payment. The borrower may simply become more and more “paid ahead” – but interest only accrues on the outstanding balance, and the outstanding balance is whatever is left after all the payments have been calculated – so as long as the borrower keeps paying, the balance will be reduced as expected.
The problem would be if the borrower stopped making payments because of their paid ahead status – in that case there would be no particular benefit for being paid ahead.
Regarding the making it “more complicated” I do not think that there was any confusion about the extra payments being applied as many have said and quoted here. It makes sense that they payments go to fees, interest, and then to reducing the principal when all fees and interest are current.
The issue I brought forward is that “paying forward” does NOT remove the obligations to make the minimum payments in future months. In my example, I owe 60 dollars for the next 5 years. If I send 720 dollars on January 1st, my balance will drop from 3,000 to 2,300 in January. This will probably mean I will shorten the loan by 13 to 15 months. However, as I learned with the servicer UAS is that I am STILL expected to pay in … February. The fixed amortized payment did not change but my principal reductions increased as the balance subject to interest diminished.
Others might have had a different experience but in my case, that student loan functioned like a credit card. You can pay it in full and be done with it, but sending in more than the minimum payment in Month 1 does NOT make the minimum payment in Month 2 or 3 change by much. If one has fixed payments due from the original amortization, it will NOT change the monthly payments until the last payment is made.
The benefit of paying more is to shorten the loan. And that is good, but know that lumping payments does not waive future “prepaid” payments. As I wrote, I learned by experience!
OP, what does your S’s promissory note say about the application of payments in excess of the scheduled amounts? Everything else is speculative, even if the loans have “standard” terms.
@xiggi yes, the situation you describe is no different than any other fixed rate amortizing loan such as a home mortgage or auto loan - unless you pay in full or refinance, you are still obligated to make the original fixed monthly payment until it’s paid off. And as you note, if you send in more payments than the original payment amounts, the loan will pay off sooner than the original loan term.
@Miller514, you should ask him to look at (copy of) the promissory note he signed. The lender will have the original and, if things haven’t changed because of this new computer thing , return it stamped “Paid in Full” when the entire loan is discharged. I just rediscovered my H’s 25±year-old original med school promissory notes when I shredded some files.
I’ve paid off PLUS loans with 3 different lenders and had a promissory note returned. Then again, I never signed a paper note either - just clicked some buttons on a web site.
However, I know that I overpaid one and the lender sent me a check for the overpayment. There was one where they gave me the wrong payoff amount and the last statement showed that I owed Sallie Mae 5 cents. Guess what? I called them up and they waived the balance! A whole nickel I never had to pay…
@calmom said: Unpaid interest and fees are added to the loan balance – so there is no advantage to the lender to pay down “principal” without first paying down accrued interest and fees – the interest is charged on total outstanding balance. That is, once the interest & fees has accrued, it is essentially incorporated into principal.
I don’t think so. It is not compounded interest but simple interest. The fees and interest are only capitalized when the loan goes into repayment like if any interest has accrued after being out of school 6-9 months or if the loan goes into default. Otherwise, interest is paid off with each payment, but if the interest isn’t completely paid by a payment, it is kept separate from the principal and interest only accrues on the principal. That’s why the lender pays the interest first - it’s not earning any extra on that interest balance.
The OP said her son just graduated, so his loans are going into repayment status.
I don’t see any advantage at this point to to paying down principal and letting the interest sit there - assuming that there is any interest. With only $10k in loans, it’s quite possible that they are subsidized loans and there has been -0- interest during the period of remission.
You do not get a choice to just let interest ‘sit there.’ Accrued interest is always paid before principal. The only issue is whether, if one pays more than one scheduled payment, is that payment used to reduce principal or is it used to pay next payment due. Is a double payment credited to Jan and Feb, or is it just Jan with a principal reduction?
My point is that a subsidized Stafford has -0- interest during the period of remission – so nothing “accrued” yet after the student graduates. Whereas an unsubsidized loan will have had interest running all along.
As to the issue of whether the extra payment is used to reduce principal or applied to the next payment: IF the person continues to make monthly payments on schedule it doesn’t make a difference mathematically. That is: whether the lenders statement is showing a payment due the following month or showing you paid 10 months ahead, ever payment is going to reduce the loan balance by the same amount. Interest will only run on whatever the remaining balance is.
It can make a difference if the borrower has signed up for auto-payments with the loan servicer, because if the loan shows up in “paid ahead” status, the auto-payments might be suspended – so that is something to be aware of. And as others have noted, it could have a negative impact in loan-forgiveness situations – mainly because the borrower is prepaying amounts that would otherwise be waived in the end.
, return it stamped “Paid in Full” when the entire loan is discharged. I just rediscovered my H’s 25±year-old original med school promissory notes when I shredded some files.