Applying payment to principal and not future interest

[Spikebd]

I have a quick question on making sure my lender is applying my overpayment correctly. I'm having trouble understanding my situation and would appreciate any insight. Currently I'm in med school and I've been paying off loans from Sallie Mae I took out in order to do a post bac program. They're high interest at like 9.12% and I'm using my Grad Plus loan money at around 6.5-7.0% to pay off the SM loans. I'm basically swapping the SM loans for Grad Plus loans. My question is, since I'm in school and don't need to be making any payments, should I instruct SM - now Navient - to apply all of my payment towards the principal and not future interest? If anyone can help me make sense of this I would greatly appreciate it! Just trying to save a few bucks in interest somehow.

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[KM Awad]

Yes, you don't want to be prepaying future interest. You just tell them that your check is for a the specific loan principle only. They should automatically be processing the check to cover any accrued interest and the rest to the principle.

When I was paying off my loans, I specified exactly how my payments should be applied and never had trouble with it.

Here check out a letter you can send to sallie Mae here:

http://www.physiciansense.com/financial-book-forms/

It's the one I used (it's part of my book but you can download it for free)

 

[dpmd]

But keep in mind they will take out accrued interest (the interest that has built up by the time your payment is received.

 

[KM Awad]

But keep in mind they will take out accrued interest (the interest that has built up by the time your payment is received.

That's absolutely right. Interest accumulates daily. You can estimate the daily interest by dividing your rate by 365 then multiply your principle by the rate by the day's it will take to reach by snail mail.

So
$10k x 7 days x 4%/365 = about $8

It's a bit of guess how long it will take to reach the loan servicer.

 

[dpmd]

That's absolutely right. Interest accumulates daily. You can estimate the daily interest by dividing your rate by 365 then multiply your principle by the rate by the day's it will take to reach by snail mail.

So
$10k x 7 days x 4%/365 = about $8

It's a bit of guess how long it will take to reach the loan servicer.

Plus the days before you ever sent a payment, which for the op could be many (especially since many loans start to accumulate interest from the day you got them)

 

[Stroganoff]

@Spikebd

https://www.navient.com/loan-customers/how-payments-works/loan-payment-allocation/

I'm with Navient (formerly Sallie Mae) as well and have private Signature Student loans with them, and they are now my Federal Loan servicer too. They are notorious for being difficult, but I hope those instructions help. If you want to send overpayments, they have to be done via a mailed check with clear instructions to apply extra to principle. They will default to applying overpayment towards future months by default.

Hope they revamp their site so they allow this online. They're making it difficult to pay in full.

 

[dpmd]

@Spikebd

https://www.navient.com/loan-customers/how-payments-works/loan-payment-allocation/

I'm with Navient (formerly Sallie Mae) as well and have private Signature Student loans with them, and they are now my Federal Loan servicer too. They are notorious for being difficult, but I hope those instructions help. If you want to send overpayments, they have to be done via a mailed check with clear instructions to apply extra to principle. They will default to applying overpayment towards future months by default.

Hope they revamp their site so they allow this online. They're making it difficult to pay in full.

I have had this issue with nelnet, the direct loan servicer, and my mortgage company. It is almost like these people want you to pay all the interest even if you make extra payments.

 

[Spikebd]

Yes, you don't want to be prepaying future interest. You just tell them that your check is for a the specific loan principle only. They should automatically be processing the check to cover any accrued interest and the rest to the principle.

When I was paying off my loans, I specified exactly how my payments should be applied and never had trouble with it.

Here check out a letter you can send to sallie Mae here:

http://www.physiciansense.com/financial-book-forms/

It's the one I used (it's part of my book but you can download it for free)

Thanks for all of the replies guys. So I just add a sentence specifying that I would like the check to go to the principle only? Thanks again for the replies!

 

[Scorcher31]

I can provide some insight to what I have done with navient/sallie mae, as I have been paying on my loans for years with them online and never had any problems. I have never had to send in a physical check and all the money has been applied appropriately.

1. Loans are all stuck into the same "billing group" online although you can see them individually if not consolidated. This makes it so only 1 charge/payment comes out and is applied to all of your loans. You can actually call them up or send a message on the website and ask to separate out a specific loan from the billing group so you can individually pay on that one (the one with the highest interest rate).

2. You cannot pay principal on a specific loan until the interest is paid off, that's how all loan companies work.

3. If you haven't separated out your loans, overpayment will go toward interest on ALL of your loans until gone then will be applied to principal, which makes it much more difficult to overpay

4. If you have separated out one of your loans any overpayment after interest on that one loan should be auto applied to that loans principal depending on what option you pick, it will ignore your other large billing group (keep in mind you will have 2 loan payments since it is separated out from the main billing group)

5. To me separating out and attacking the highest interest rate loan makes it very easy to make extra payments toward principal. In addition so I don't miss my loan payments I also have an autopay on all of my loans which also lower my interest rate

 

[st2205]

2. You cannot pay principal on a specific loan until the interest is paid off, that's how all loan companies work.

Just the accrued interest, correct?

 

[dpmd]

Just the accrued interest, correct?

Yes

 

[st2205]

As a follow-up question, if you're barely or not even touching the principal does it make more sense to make the minimum payments and each month dump the excess that you otherwise would pay into something else earning you interest, and then pay off all the interest in bulk once you have enough total? Then start putting all the money directly to the loans each month?

 

[dpmd]

As a follow-up question, if you're barely or not even touching the principal does it make more sense to make the minimum payments and each month dump the excess that you otherwise would pay into something else earning you interest, and then pay off all the interest in bulk once you have enough total? Then start putting all the money directly to the loans each month?

Depends on your interest rate, what will happen to the interest that is accumulating, and what kind of interest you can earn on your money. If the interest isn't going to capitalize and the rate is low enough I suppose it is possible to beat it with something that will compound your interest, but if you can beat the interest rate with an investment that is reasonably secure I don't know that the best course of action would be to pay down the loan early at all.

 

[James Martin]

If you want to be entirely clear, I suggest mailing a check (not doing this online) and including on the piece of paper exactly how you want the money distributed. Since you want to reduce a specific loan, then you need to say exactly what portion of the money goes to that loan.

 

[Plastikos]

Its pretty crappy how hard they make it to pay down the loans. I have some that are simple and have a separate category for extra payment, and others that just make it a pain. ACS in particular is pretty bad, I've paid a good lump sum extra before and they just reamortized out the loan further and didnt take the next months draw. Supposedly servicers have come under fire for this, but I've basically come to just attack them in lump sums now where they have no choice but to retire it completely.

You may also want to make sure you didnt pay all the interest up front based on your particular repayment plan, and arent already into the principal only section of the loan. No real benefit there to not investing. I have a couple more higher interest rate loans to retire this year, but after that I'll scale back (still aggressive paydown just not hyper) as I'd rather invest it.