<p>If someone is paying down their student loan, and the monthly payment according to their statement is (as an example) $65, and they make a payment of $100 each month (hoping to pay down the loan sooner), if that really makes a dent in the principle of the loan? </p>
<p>Should they be asking the lender to apply the extra $35 p/m to the principle or will the lender know to do that?</p>
<p>I'm pretty financially savvy, but I tell you, this FA stuff has my head spinning most of the time.</p>
<p>I don't know the answer for student loans, but in my very limited experience with a mortgage loan, if you pay extra you have to make sure how it is credited. It can either count as 1. payments ahead of time so you can have a gap later or 2. extra principal reduction so you pay it off sooner. The choice is yours, but you have to tell the lender which.</p>
<p>With Citibank they ask you to stipulate how you want them to apply the extra money. In other words, to reduce the principal but still have the next payment due in 30 days, or to apply it to the next scheduled payments and buy some time until the next payment is due.
I'm guessing that other lenders do the same, but "private" (non-government) loans may well be different.</p>
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If someone is paying down their student loan, and the monthly payment according to their statement is (as an example) $65, and they make a payment of $100 each month (hoping to pay down the loan sooner), if that really makes a dent in the principle of the loan?
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<p>You call the "folks" behind the loan and ask for new re-payment terms. Ask them to start sending you new bills, for lack of a better way of putting it, where it states that your new re-payment terms are $100.00 a month. Make sure, when you call the "folks" that they agree to your new terms and that they make a proper notation of it in your account a.s.a.p. </p>
<p>It is not really hard. You just have to work the phone and make sure that you are sent a proper statement with your new re-payment terms and that they apply the higher payment amount to your balance and all. </p>
<p>Now, w/r/t the principal, that is your own private business (far be it for me to ask you what it is). You might want to set up Excell to tend to that. Maybe make doubly sure that you can make a high enough payment where you are already covering your interest and all? I do not know.</p>
<p>I don't see the advantage of committing to the higher payment unless you are afraid you don't have the self-discipline to pay it down on your own.
I could also see paying the contracted amount one month, an extra $400 one month, extra $150 the next, etc., as your circumstances permit.
No need to go to the trouble of "re-negotiating" at all.</p>
<p>From the lenders mouth (via an e-mail response to my telephone inquiry):</p>
<p>You may pay more than the required monthly installment amount. Payments are credited first to satisfy any outstanding installments due. Any additional amount is then applied towards future installments. Payments that satisfy future installments do not stop the accrual of interest. Partial payments received above the amount due will also be credited as partially satisfying future installments.</p>
<p>Whew, that's a mouth full.</p>
<p>According to the rep I spoke with, when I consolidated my loans in 2005 (yes, these were my student loans) I was put on an "interest only" schedule for the first 2 years, which is just about up. I somewhat recall that conversation (I was offered choices), and the purpose was to pay down nearly all the unsubsidized interest right away. According to Jim (my rep) beginning Oct. 2007 I will begin to see a larger nicking away at the principal of the loan, as opposed to the comparatively smaller one I currently see. </p>
<p>On the other hand my heart skipped a beat when he mentioned the loans final payment date of Sept 2020! (I went back to school in 2001). </p>
<p>Gather 'round children, we're having a party! Grandma just paid off her student loans!!! Yeahhhhhh!!!! (I can see it now) </p>
<p>Thanks everyone for your input.</p>
<p>Oh, one last thing. I won't "commit" to larger payments, I will continue to do as I have been, which also grants me a reprieve if I ever need one.</p>
<p>The extra money will go to principal, but the lenders account for it by applying it to future payments. I have Sallie Mae and they push the date of the next payment due forward -- but I just keep paying the same time each month in any case. No matter how the lender characterizes it, it reduces the outstanding balance, and interest on student loans is calculated monthly based on the balance.</p>
<p>In other words -- lets say you owe $10,000 and the annual interest rate is 6%. That means each month your interest is 0.5% of the total outstanding balance -- or $50 interest owed the first month. If you made an interest-only payment of $50, the next month you would owe 0.5% of interest on the total-- or $50 again. </p>
<p>However, if you pay $100, then the $50 above and beyond the amount you paid reduces your outstanding balance to $9950. So 0.5% means that in the interest you owe is $49.75 - and now $50.25 applies to principal.</p>
<p>Now what my lender does with this is sends me a new statement with a different due date, treating me merely as being "paid ahead". So I don't get something in the mail from them showing an "additional payment to principal" -- however, I can go to their web site and pull up my loan history -- and it shows payment & interest and does show the extra money being applied to principal.</p>
<p>calmom yes, Jim (the rep) explained my "extra" payments exactly as you've described, in fact my next payment isn't actually due now until Feb 2008. I'm way "ahead" of the game. He also suggested I go online and see it for myself.</p>
<p>Your explanation, written, rather than simply verbal, is what I was looking for. Thank you for the detail.</p>
<p>I like to read my contracts. If I remember correctly when we consolidated in 2005, the lender specifically spelled out that if you make extra payments (payments to be applied either to future monthly payments or assigned to principle) and then STOP making monthly payments inorder to "catchup", the reduction of interest incentive is lost. </p>
<p>I specially called the lender to clarify this point since we were making extra payments while in school, and the method on application of payment was different from the consolidation loan. For us, the loan stated that if you make 48 months of on-time, monthly payments, that the interest rate would be reduced by 1%. Our PLUS was consolidated at 4.375%, with autopay for 4.125%. In a bit more than 2 years that rate will be 3.125%. We are 1 month payment ahead, but if I STOP making just one payment for any reason, we lose the 1% discount. That 1% on our ~$40,000 PLUS is a big deal! </p>
<p>I'd be very careful in missing a monthly payment, even though your balance say you paid ahead.</p>
<p>thisoldman I have no intention of skipping or missing any payment. And I too am now becoming eligible for rate reduction for being ontime. I'm not certain yet whether I will have them auto-debit or not. The reduction isn't enough to have me jumping for it. </p>
<p>If you consolidated in 2005, you likely have a very favorable, tax-deductible rate, life-insured as well.
I'm facing decades of payments, which I hate, but it will likely always be a poor decision to pre-pay given that I could buy a government bond that would pay me a higher rate than the interest rate on the consolidated loan.
It would make sense to put more money down on a car, for instance, than to use the same amount of cash to pre-pay the loan.</p>
<p>But I could see how a kid just out of school and on his own could see that and think he could skip a payment. My son was paying his interest payments on his loans while he was in school, and halfway through he consolidated. From then on his monthly notices said "no payment due." So he insisted he did not have to pay. He was right, he didn't but the interest then accumulated. By the time he graduated he was a bit disappointed he did not make those payments anyway.
I will try to make sure he understands all this regarding paying ahead because he has asked me if he could and I could see him getting that bill with "no payment due" and believing it. Or at least not understanding the consequences.</p>
<p>"just" u r welcome. My wife and I had the same conversation a few days ago. She wants to accelerate, I said we could instead use the money for retirement funds. Soon to be 59.5</p>
<p>PS:Our PLUS is a 25 year, level payment program which will put the final payment in our early 80's (2030). You are fortunate. My mother is turning 90 in a few more months, Dad is 88, my aunt is 94, my inlaws are 86 and 87. I probably will see every last payment made. Feel Better?</p>
<p>The upside is that the payments and rate are manageable. The rate rate is low enough where even a offsetting CD can amortize the loan. I have better uses for any debt acceleration payments.</p>