Recent Divine Discussions

Wednesday, August 1, 2007

Student Loan Drama

I am in the middle of updating my net worth and getting things ready for my end of the month financial report for July. I was in the midst of listing the balance of my student loans when I realized that there was no change. Did I forget a payment? I logged on to my account and saw that I made a payment for this month. So why hadn't my principal balance changed?? I looked at my past statements and it turns out that my principal balance has remained the same since February. I was furious! Something was wrong and needed to get fixed pronto.

I called the student loan folks and spoke to a rep. After about 30 minutes on the phone I found out that because of the payment I chose, my payments were only being applied to the interest on my loan and would be for the first two years of repayment. After the two years, my payment would increase by $20, which would start applying to the principal balance. WHAT?? Of course this wasn't explained to me during the consolidation process. Maybe it was somewhere in the 5 or so pages of finance jargon I received through the mail but at that time I was still in college and was focused on having the smallest loan payment possible. I currently have the graduated payment option. If I chose the standard option my payment amount would double. I can't afford to do that right now. Not with my current goals.

Of course I noticed another discrepancy while speaking to the rep. From what she explained to me, my current payment is applied to the interest and anything I pay above that should be applied to the principal balance. Well my payment amount is $141 and I have paid $145 since February. And since my principal balance hasn't changed then obviously that overage has not been applied to it. Turns out that I need to specify where the extra money goes. Are you serious? I would think that it would be common sense to them that anything I pay over my minimum should go to the principal. Who in their right mind would want that money going into the loan company's hand. According to her, this same 'practice' applies to your mortgage, car payment, etc. This just shows how knowledge is so important.

I don't know how to really approach my student loan repayment now. It's last on the list in regards to my total debt payoff plan. Priority right now is my card debt, next will be my personal loan, then my car note, and last will be my student loan. I was hoping that paying $5-10 more on my monthly payment would help until I was ready to focus more on the loan. I'll probably keep that going and just mail my payment to the 'Special Payment' center instead of making them online. Once I get kill off my credit card debt I'll have them switch my payment plan to the standard option. At this rate, that won't be until July of 2008.

If only I could just win the lottery.........


Single Ma said...

Yep, that's Sallie Mae for you. Been through the same thing. We live and learn.

When you pay more than required, they don't keep your money. They apply it as an advanced payment. For example, if your payment is $100/mon and you pay $200 in July, the due date for your next payment will be advanced to September. They will treat the extra $100 as an advanced payment for August, unless you specify otherwise. This allows them to collect the same amount of interest every month. And yes, all "installment loans" are treated this way.

If you decide to pay more than required, just make two separate payments and specify the second one as a "principal only payment." You can select this option online or write it on the memo of your check. Whatever method you choose, just remember to make any additional principal payments separately.

Dimples said...

@ single ma

Thanks for the advice. I actually have Nelnet. I was never aware that you had to specify until now. I never had to do that with my car note. I will however put a statement about my overage payment going to the principal in the memo section when I pay online from now on.

SavingDiva said...

I was not aware that you had to specify that you wanted your payment to go to the principle. I will be very careful during my next loan signing. Thanks for the information!

Jon said...

Wow I thought that was a myth! This is a really deceptive lending practice. You should switch to the standard option immediately if you have the option and it means the principal gets reduced. What if you refinance it in 2 years? You'll have the exact same loan balance so it's like you haven't been making payments at all!

I've never heard of a loan where the first two years only pay interest and then the payment *increases*!

Dimples said...

@ jon

Can you refinance a student loan? Wouldn't you lose your low interest rate?

Jon said...

Yeah you'd lose the low interest rate, but I guess people still do that just to consolidate their loans so that they have fewer minimum payments to make each month. Not that I was recommending that, but I'm still really surprised at the interest-only scheme they have going!