Parent Plus Loan Question - Paying it off now or later?

Paying for College
1

Parent took out a $8,000 loan to use for my expenses for my year studying abroad for 2016-2017. I applied for a scholarship and was just recently awarded $3,500. My parent is actually my grandmother, she’s really ignorant to college finance despite me printing out copies of all my expenses, loan terms (such as subsidized, unsubsidized,) interest percentages. So I’ve been reading personal finance literature since high school and have been doing this all on my own. I really want to throw everything towards the plus loan because the other loans I have are max federal. $5500 and $6500. The interest isn’t subsidized on plus (but payments are held off while I’m in school) also the rate is much higher, nearly double the other loan rates.

My question is: If I pay off part of the Plus loan ($3,500), will the interest that the loan is building be based on the remaining balance of the loan or the principal loan?

I’m asking because junior and senior year, I’m going to be living in an off-campus apartment which will cut my housing expenses in half, so I will be borrowing less. However, I’m worried because my grandmother does not work so she doesn’t have disposable income. If I needed money for something, it’s not there. This past year and a half, outside of aid I’ve paid for everything myself. Books, school fees, etc. If paying off the Plus loan now won’t affect the interest vs if I paid it at graduation, I kind of would prefer to put it in my savings in case I need money for an emergency.

2

I called my school’s financial aid office about this and they told me they “didn’t know” and I need to “call the government.” My dream goal would be to pay off my loans within 5 years of graduation. For junior year, with all my aid excluding loans, I’m short $3,971. That allows me to only borrow subsidized loans. I have a lot of AP credits so I am academically ahead. Senior year, I will be taking a reduced load and will not need to borrow. Also taking 3 courses each semester senior year would allow me to work a decent amount of hours and that could go to paying my loans.

3

Definitely “call the government” to be sure of the terms for your individual loan, but in general my understanding is that at least in the past if you pay off the principal of your loan early, you can request IN WRITING that they refigure your interest payments.

My understanding is that each payment you make toward loans first the loan org credits the interest payment that you need to make EACH MONTH and then the next few payments as they choose, which are usually all filled with interest, not principal. You can take control over this and have them apply it to the principal. Understanding how this works is crucial to paying off your loans early.

Each month your interest/principal ratio in what you owe is slightly different and it favors the lender. The loan org usually puts all of your interest n your first payments, then the principal. In other words if you have a 10-year loan repayment schedule, the first 5 years you pay virtually all interest, then comes the principal. After 5 years of payments, you wake up and discover that you still owe the balance of your loan, virtually untouched. That’s frustrating. The interest is not evenly spread across all loan payments, as most people assume, unless this has changed since I did this. To find out how your interest is spread, you should request in writing a schedule of your loan payments that details what each payment covers in terms of interest and principal. That way you know where your payments are going, toward interest? or toward principal? The loaning agency is required, I believe, to provide this for you if you request it in writing. Each time you make a payment, make sure that you don’t just send a check and assume they will take care of you. They will use that check to take care of themselves and put it toward interest first. Assume this is how they act in order to keep yourself safe. If you’re sending in more than your required payment of that month and you’re trying to pay down the principal fast, this is what you want to do.

The loan agency usually wants you to pay that month’s loan amount at the very least, then any extra they will apply to your next several months’ payments, which are usually all loaded with. You don’t want this to happen. You want anything extra to go to principal.

What you need to do is to 1) send the check and state IN WRITING that you want to apply your payment first to that month’s payment (if you are required to do so) and then explicitly state you want anything extra to apply to the PRINCIPAL. 2) Ask them for written CONFIRMATION that this has happened. 3) Ask them to send you REFIGURED payment schedule based on your remaining balance. To reiterate, be sure to ask after each payment to 1) apply it to the principal, rather than interest and 2) to refigure your loan repayment schedule and 3) to have them send to you a pdf or in writing through the mail a new schedule of payments, so that you can see a) how much principal is gone and b) how the interest is apportioned over the life of your loan.

okay??? You can do this. My husband and I put ourselves through undergrad and grad schools without any help from parents at all, and we paid off all of our loans in a single year, by working several jobs that year, no car, no vacations, and eating very simple food. Lots of hard work, but we were free after one year. Also, we kept the loan companies “honest” by using the technique above.

After you do this, you should maybe consider going into finance . . …you’re a smart cookie and have a lot going for you if you’re already taking this all on.

4

@dustyfeathers I am on the run so I am going to read your advice on my phone. But wanted to say thank you and just noticed the comment about doing finance haha. I am a Journalism major and want to be a broadcast reporter. Finance would make more money starting out haha. I’d actually really love to be a speaker volunteering to talk to area high school kids about financial planning for college because so many kids don’t learn about it. But I don’t know how to get schools to allow me to do that without finance credentials.

5

@Dustyfeathers We started the Plus payments before graduation and I had trouble applying a larger payment to principal, when extra was included in the payment check . What they wanted to do was apply it to the ongoing payments. (And ours were a fixed amount.) This was several years ago. OP may be able to pay down principal via a separate transaction. A few things changed.

6

@lookingforward The rules change all of the time, and you’re right she needs to look into her individual situation. Also, though, agreements can sometimes be worked out.

@mel159 Good luck with your journalism career. I’m sure that you will do well at that too, esp. if you’re able to plan ahead as you clearly are able to do, look forward to a goal and reason back to where you currently stand (as you clearly already do), and if journalism is your passion, then you’re going to do well regardless of what you go into.

Best of luck.

7

If the PLUS loan was disbursed less than 120 days ago, I have excellent news for you: Pay off the $3,500 NOW, and you will actually be cancelling $3,500 of the loan. The 4.288% origination fee and all interest accrued will be canceled. This is true for any Direct Loan. So … contact the servicer immediately & tell them you want to cancel $3,500 of the loan … ask them how to do this. They have to let you do it if the loan was disbursed within the past 120 days. If you have issues, PM me (I am a financial aid director). Be clear to them that you want to CANCEL that portion.

If it has been more than 120 days, it still makes sense to repay now … because it will result in repaying less over the long run (due to interest). Tell them you want to use it FIRST to repay outstanding interest & THEN to repay principle.

8

On ANY loan (except a prepaid interest/ Rule of 78th loans, and no federal loan uses that method), the terms of the loan are going to dictate the lender apply the payment to outstanding charges (late payment fees, bounced checks, etc), then to accrued interest, then to principal. Where people get confused is if they pay a double payment and then want to skip the next payment. For that you have to ask the lender for special processing or the double payment is going to be used to pay accrued interest and then an extra large payment to principal; when the next payment isn’t received the next month, interest will continue to accrue (and perhaps a late payment charge). If you have accrued interest, you cannot instruct the lender to apply a payment to principal first; the interest has to be paid first.

You have to decide if you want the money available for an emergency in your junior/senior year, but it is expensive to have money just sitting in the bank. I think if you have it you will spend it, whereas if you repay it and need more money in junior/senior year, you might find another way to get that money (work, spend less, sell some belongings).

The lender is required to follow the terms of the loan and apply payments as the terms require. The lender is NOT required to recalculate your payment schedule every time you make an extra payment to principal, but some will do it upon request if the principal is significantly decreased. In this case, the OP has no regular scheduled payment schedule yet, so when the loan goes into repayment status, the payments will be calculated based on the balance at the time repayment starts. Think about a 30 year mortgage - the bank is not going to change your payments if you make an extra payment once or twice per year, but you are going to pay off the loan years earlier by making extra payments. Each of those extra payments went to principal reduction because the outstanding interest was paid by the regularly scheduled payment that month. If the accrued interest is paid, there is no place to apply the extra payment except to principal.

9

You’re on the right track, paying off the loan with the worst terms first. Always check that the payment amount was applied in the way you intend, as in post #4 above.

10

Would three courses (9 credits?) affect your full-time status? Will that impact your financial aid?

11

Ok so summing it up, it seems like I have to call and check the terms of the loan. And that the interest has to be paid before the principal. The $8k is in two parts so they’ve only disbursed $4,000 so far. And the interest is $50.

@twoinanddone I agree that I am more likely to spend it if it’s in there. (Only because I know myself and that’s how I am. I wouldn’t blow all of it but I could see myself using ‘emergency’ loosely. Last year, several times, I borrowed money from my roommate, normally small amounts. I only had a work study Spring semester, didn’t have a job in the fall. And by Spring, most of the money I had from summer was nearly gone. The thing is I am very loyal about paying it back. The most I borrowed was $50 because I had an extra tuition charge and I would go ok I’m getting paid next Friday and then I will withdraw the money from my check and pay you right away. But I don’t want to have to use my friend as my personal ATM if I don’t have to. What I’m thinking is That when the spring disbursement of the plus comes, I’ve already travelled a lot, I tutor in English a little bit, I can hopefully cut some expenses and not spend the full $4k and put the remainder in savings, and the $3500 to the loan.

When I asked the question, I was basically talking about if paying the $3500 RIGHT NOW would affect the interest that’s building now. But from your answer, I don’t think it would affect the interest now, only the interest on the loan after the grace period. (6 months after grad)

12

@Jamrock411 Good question. I’ve been receiving $13,815 in gift aid in the form of Pell Grant, PA State Grant, School Grant, Private scholarship. I checked the requirements of each. The only thing that’s affected is Pell Grant. It won’t be stripped away but I wouldn’t receive the full amount. I read that I should receive 75% of the grant.

That is the part of the plan I am least sure about and since it’s a pretty unprecedented move, there’s not much info about it. The thing is I will have to struggle to only take 9 credits. There are a few classes I am interested in taking that I won’t be able to because to stay on track, I will only be able to take requirements. On one hand, it does make me feel a little bad to miss out on some of the things I’m interested in taking but on the other hand, how many people take interesting classes, pay more money for them, and wind up in the same place as those that don’t? For example, at my school a 3 credit course costs about $3,000. Yes it would be interesting to take a class on Mexico after studying Spanish for a year in Spain but is it worth THREE THOUSAND EXTRA DOLLARS when I could just read a book about it? Or data journalism which is interesting but I could learn those skills on the job? It doesn’t seem worth it to me.

For two 9 credit semesters, my tuition would be $13,562 vs $17,786 which is the full-time rate. To do a 9 credit semester senior year, I need to take two 3 credit courses at my community college. They offer them online during the summer and january break. Those two classes would cost $840. However, I’d be saving $3,384 by doing this which could be months of saving for a new college grad trying to pay down the loans.

13

As far as I know there is NO grace period on the Plus loan. Interest will keep accruing.

If the first semester amount has been disbursed less than 4 months ago, as @kelsmom said, you can contact the loan servicer and your school and CANCEL $3500 of that Plus loan amount. Then any interest accrued on that amount, and the origination fee would be canceled as well.

Then only $500 plus interest would be owed.

If you don’t need the $4000 for the second semester, then don’t take it! Let the school know you don’t need it.

Your grandma is the one required to pay back the plus loan. So if it’s a hardship for her, then don’t have her borrow any more.

14

You can get 8 semesters of PA state grant, for a full time state grant you have to take 12 credits a semester.

If you take fewer credits than full time for Pell, then it will be reduced as well.

You better stop at your school’s financial aid office with your plans of taking 9 credits senior year and find out how it impacts your aid.

15

You’d also have to pay for the CC classes out of pocket

You did not mention student loans, did you take your direct student loan for this year?

16

If the full time tuition is $17,000 and you have $10,000 in Pell and state grant, and $7,500 student loan, you could cover it.

17 
    @mommdc cover what?

Here are the requirements straight from PA State Grant website “Are enrolled at least half-time (defined as at least six semester credits but less than 12 semester credits per semester, or the equivalent)” Pell sees a reduction but that is all. Already discussed the private scholarship and school grant, both cover 4 years of aid, regardless.

Here is a more specific breakdown. These are lines from this year’s package. Since my family income will not change, these should stay the same, per year:
Pell Grant: $5,815.00
School Grant: $4,000
PA State Grant: $4,004
Scholarship: $6,000

Granted, this number is more than tuition but I need to pay housing with this as well, books, and I will have food expenses. Hoping to supplement these costs through working.

This year I had federal subsidized, unsubsidized, and Plus loan. I do need the Spring semester disbursement but I’m saying I think it’s possible not to use the full amount. Less travel, less trips to Spanish cafe, less tourist events in the city I’m studying because I’ve already seen them.

I feel like some posters on CC don’t get that while debt is a crippling thing, there are very successful people with debt and that it is a very personal decision. I am not opposed to having debt, especially being a strong, academic full-time student attending school in a big city, living on campus, studying abroad, all things that were non-negotiables in my mind for my college experience.

I did mention my goal to pay my loans off within 5 years. It is imperative to me to pay off the plus loan before payments are required (we deferred them to 6 months after graduation). If that is paid, I should have loans that are about $15,000 at graduation, which is less than half of the national average. $15,000 for four years of living on my own, going to one of the top colleges in my field, attending a large public college in a large urban city, and visiting 12 countries while studying abroad in Europe for a year, and acquiring a foreign language seems worth it for sure. Having a year with my expenses covered without having to ask to borrow money, not feeling overly restricted with the Plus loan feels worth it for sure.

And at the end of the day, I have to live with that.

18

The interest IS currently accruing, so every dollar you have ‘out’ is accruing interest under the terms of that loan. You aren’t paying the interest as it accrues right now, but it’s still building up. You will benefit it you pay it off now, but like kelsmom says, if you can reverse the transaction right now, do that and the origination fee will also be refunded to you. OR, if you need the money you already borrowed, just cancel the January disbursement and use the $3500 scholarship to pay the Jan expenses. Interest is not accruing on the $4000 your grandmother is scheduled to borrow in January and won’t be until it is disbursed.

Interest on Plus loans and the unsubsidized Stafford loans begins immediately. The PAYMENTS are deferred for the grace period, but the interest IS accruing.

19

@mel159 – interest on a PLUS loan (and on just about every type of loan) is calculated on the balance remaining. Any payment you make will be applied first to outstanding interest, and next to principal.

It will be based on the remaining balance.

I think Kelsmom had the best advice.

But it also make sense to look at your overall budget. For example, you may decide that it make more sense to pay down $2500 of the PLUS loan and have $1000 of cash reserves – it really depends on your overall financial situation, and any reduction at all in the loan amount will be beneficial. My daughter ended up racking up lot of credit card debt while she spent time abroad in college … (partly because she had a credit card) … but a good idea to have something to fall back on.

20

@mel159 I meant that you could cover the full-time tuition of $17,786 with full time Pell, full time state grant, and student loan.
But I did not know that you had housing/food expenses as well. I assumed you lived with your grandmother.

So you say by taking only 9 credits the last 2 semesters, you can save $3,384

But by reducing Pell to 75% ($4,361) and state grant to 50% ($2,002) you would potentially lose $3,458 in aid.