Possible to pay back just unsubsidized portion of consolidated IBR loan?

[dankasprick83]

Hey all,

I have a relatively average amount of medical school debt that I have packaged into a consolidated IBR loan with both a subsidized portion and an unsubsidized portion. I have read that during IBR with a consolidated loan the government will cover the difference between your monthly accumulated subsidized interest and your monthly payment (calculated based on income and generally very low for a resident). My question is whether or not there is a way to make a loan payment toward the monthly UNSUBSIDIZED interest specifically and then let the government continue to subsidize the difference between the monthly subsidized interest and the minimum monthly payment. For example, if IBR monthly minimum payment is 80 dollars and monthly subsidized interest is 280 dollars, the government would subsidize 200 dollars a month beyond your 80 dollar payment so that no interest will accrue on the subsidized portion of the subsidized loan. Unfortunately, at the same time you may have 500 dollars monthly interest accruing on the unsubsidized loan that I would love to pay off each month (and write off on my taxes). My fear is that they would take 200 dollars of that 500 dollar payment and apply it to the remainder of the subsidized portion which would effectively cause me to lose out on a potential 200 dollar per month government subsidy.

Hopefully this makes some sense to someone out there!!

Thanks in advance for any tips anyone might have,

DK

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[thesauce]

Hey all,

I have a relatively average amount of medical school debt that I have packaged into a consolidated IBR loan with both a subsidized portion and an unsubsidized portion. I have read that during IBR with a consolidated loan the government will cover the difference between your monthly accumulated subsidized interest and your monthly payment (calculated based on income and generally very low for a resident). My question is whether or not there is a way to make a loan payment toward the monthly UNSUBSIDIZED interest specifically and then let the government continue to subsidize the difference between the monthly subsidized interest and the minimum monthly payment. For example, if IBR monthly minimum payment is 80 dollars and monthly subsidized interest is 280 dollars, the government would subsidize 200 dollars a month beyond your 80 dollar payment so that no interest will accrue on the subsidized portion of the subsidized loan. Unfortunately, at the same time you may have 500 dollars monthly interest accruing on the unsubsidized loan that I would love to pay off each month (and write off on my taxes). My fear is that they would take 200 dollars of that 500 dollar payment and apply it to the remainder of the subsidized portion which would effectively cause me to lose out on a potential 200 dollar per month government subsidy.

Nope

 

[dpmd]

You can try to mail a paper check to the special payments address for your loan servicer and indicate that the payment is for loan group B (assuming that is how they designate the loans and A is the subsidized). It is possible to allocate principal payments in this fashion. I don't know whether they would allow you to allocate interest payments in that fashion (somehow I doubt it). You definitely can't allocate an extra payment to principal on the unsubsidized loan if there is still interest outstanding for the subsidized loan (if both are with the same servicer). The interest doesn't capitalize until you change payment plans though, so perhaps you may want to save up extra payments you wish to make until a point in time where the government subsidy is already used up (only good for 3 yrs I believe). That way you still get the benefit of the government subsidy as well as the benefit of paying down interest.

 

[RangerBob]

I believe the answer is almost definitely no, you cannot--but it's worth asking your servicer.

When I log into FedLoan, I can selectively pay off any loan I want. The problem is that even though you see a subsidized and unsubsidized loan listed in your loan summary, they're just separated out for convenience--they are actually one loan, with one interest rate. They are just separated because of the fact that they accumulate interest differently. Because of that, when I go to the link ("make a payment" and then "specify loan amounts") that lets me apply x payment to any particular loan, while each loan gets it's blank box where I can enter a payment, my sub and unsub consolidation loan together only get one blank box. (I only consolidated my FFELP loans so they'd be direct loans--mostly so I'd avoid this exact problem and be able to selectively pay of GradPlus loans which are at a higher rate)

So online while I can selectively pay off any loan at a time, I cannot selectively pay off a portion of my consolidation loan--because it's just one loan. I highly doubt it's possible to do so, but it couldn't hurt to call your servicer and ask. But keep in mind most reps really don't actually what they're talking about--most don't actually realize that a consolidation loan with a subsidized portion and unsubsidized portion are actually still part of just one loan. I dealt with that for about three months before I was finally able to talk to one of the consolidation loan underwriters who finally fixed an issue with my consolidation loan. So even if you get a "yes" answer I would wager that when you send in that extra payment it would get applied proportionately to the sub/unsub portions, because generally the computer that processes the payment knows what it's doing.

 

[RangerBob]

You can try to mail a paper check to the special payments address for your loan servicer and indicate that the payment is for loan group B (assuming that is how they designate the loans and A is the subsidized). It is possible to allocate principal payments in this fashion. I don't know whether they would allow you to allocate interest payments in that fashion (somehow I doubt it). You definitely can't allocate an extra payment to principal on the unsubsidized loan if there is still interest outstanding for the subsidized loan (if both are with the same servicer). The interest doesn't capitalize until you change payment plans though, so perhaps you may want to save up extra payments you wish to make until a point in time where the government subsidy is already used up (only good for 3 yrs I believe). That way you still get the benefit of the government subsidy as well as the benefit of paying down interest.

I'm not sure if this is actually true-if the loans are separate (not a consolidation loan), you should be able to selectively pay off interest/principle on any particular loan you want, regardless of whether you've paid off the outstanding interest for any other loans. The interest subsidy benefit is what makes this uncertain, but I don't think the program looks at additional payments--I think it just looks at how much subsidized interest you accrued and how much of that you paid off, then the gov't pays the rest. In an ideal world where rules made sense then additional payments would be taken into account and that subsidy would be decreased or eliminated dollar-for-dollar, but I don't know if the government/loan servicers have set things up this way. While I can certainly allocate an extra payment to any particular loan I want via the online bill-pay, I haven't done so, so who knows whether that additional payment actually does get taken into account when my unpaid subsidized interest gets paid off by Uncle Sam.

Regardless, you make a good point people forget about--none of the interest capitalizes until you leave IBR. So unless someone makes enough to pay off all the accruing interest on particular loans and pay off some of the principle so that the next month the accumulated interest decreases, there's no benefit to doing so. If all someone can afford is interest-only payments, it's probably better to just put all that money in savings and pay it off at a later point in time (such as when/just prior to becoming an attending/leaving IBR and interest capitalization)

 

[dpmd]

I'm not sure if this is actually true-if the loans are separate (not a consolidation loan), you should be able to selectively pay off interest/principle on any particular loan you want, regardless of whether you've paid off the outstanding interest for any other loans. The interest subsidy benefit is what makes this uncertain, but I don't think the program looks at additional payments--I think it just looks at how much subsidized interest you accrued and how much of that you paid off, then the gov't pays the rest. In an ideal world where rules made sense then additional payments would be taken into account and that subsidy would be decreased or eliminated dollar-for-dollar, but I don't know if the government/loan servicers have set things up this way. While I can certainly allocate an extra payment to any particular loan I want via the online bill-pay, I haven't done so, so who knows whether that additional payment actually does get taken into account when my unpaid subsidized interest gets paid off by Uncle Sam.

Regardless, you make a good point people forget about--none of the interest capitalizes until you leave IBR. So unless someone makes enough to pay off all the accruing interest on particular loans and pay off some of the principle so that the next month the accumulated interest decreases, there's no benefit to doing so. If all someone can afford is interest-only payments, it's probably better to just put all that money in savings and pay it off at a later point in time (such as when/just prior to becoming an attending/leaving IBR and interest capitalization)

The part you bolded is actually a fairly standard part of repayment. I don't know of a servicer that doesn't specify that any payments received will first be applied to any penalties/fees, then unpaid interest, then principal. Now if you have loans with different companies that is a different story.

 

[RangerBob]

The part you bolded is actually a fairly standard part of repayment. I don't know of a servicer that doesn't specify that any payments received will first be applied to any penalties/fees, then unpaid interest, then principal. Now if you have loans with different companies that is a different story.

I agree completely. But I believe that applies only to a single loan--not all your loans as a group (though penalties/fees may be an exception and have to be paid off first regardless).

I'm currently making voluntary payments on one of my private loans (the highest interest rate one) with Wells Fargo--first I paid off the interest, now I've been paying off principle (and interest that accumulates in the meantime). My other loans with them are still in grace, accumulating interest, which I'm not paying off.

What I was trying to say before was that as long as you're making the minimum payments, you can usually apply additional payments to any particular loan that you want, regardless of whether there's outstanding interest on the other loans (as is my case). Each loan has its own MPN, so with the exception of delinquent payments/fees, you should be able to apply additional payments wherever you want (with the exception of paying the unsub vs sub portion of a consolidation loan--since it's just one loan)

 

[dpmd]

I agree completely. But I believe that applies only to a single loan--not all your loans as a group (though penalties/fees may be an exception and have to be paid off first regardless).

I'm currently making voluntary payments on one of my private loans (the highest interest rate one) with Wells Fargo--first I paid off the interest, now I've been paying off principle (and interest that accumulates in the meantime). My other loans with them are still in grace, accumulating interest, which I'm not paying off.

What I was trying to say before was that as long as you're making the minimum payments, you can usually apply additional payments to any particular loan that you want, regardless of whether there's outstanding interest on the other loans (as is my case). Each loan has its own MPN, so with the exception of delinquent payments/fees, you should be able to apply additional payments wherever you want (with the exception of paying the unsub vs sub portion of a consolidation loan--since it's just one loan)

Well, back when there was the direct loan servicer, they certainly required paying all outstanding interest before applying payments to principal. Same for the loans I had with ACS, nelnet, and one other servicer I had before (can't remember the name). These were all federal student loans, so it would make sense that private loans would be treated separately. Or maybe the rules have now changed since I was aggressively paying down loans (I only have loans at 1.625% now)

On the other hand my consolidation loans with nelnet each had individual group numbers (separating subsidized from unsubsidized) which let me pay down my unsubsidized loan preferentially (after all the interest was paid on all the loans I had with them).

 

[RangerBob]

Well, back when there was the direct loan servicer, they certainly required paying all outstanding interest before applying payments to principal. Same for the loans I had with ACS, nelnet, and one other servicer I had before (can't remember the name). These were all federal student loans, so it would make sense that private loans would be treated separately. Or maybe the rules have now changed since I was aggressively paying down loans (I only have loans at 1.625% now)

On the other hand my consolidation loans with nelnet each had individual group numbers (separating subsidized from unsubsidized) which let me pay down my unsubsidized loan preferentially (after all the interest was paid on all the loans I had with them).

Interesting. I guess can only speak with certainty that it's possible to selectively apply payments even if the other loans have outstanding interest with Wells Fargo, and while it seems possible when I log into FedLoan, I haven't actually made additional payments to specific loans when there was still outstanding interest on other loans. I don't really plan to either until I'm an attending...

That's interesting about the consolidation loan as well--I have a direct consolidation loan, which is fairly new, so if yours wasn't I wonder if that's why you were able to pay down the unsubsidized loan separately. (Or perhaps the government didn't used to treat them as a single loan? Who knows...)

1.625 sure is a nice rate. While my private (and variable) loans are near 2-3%, my federal loans are all 6.5-8.5%

 

[dpmd]

Consolidated at that sweet spot when rates were still variable and at an all time low. Plus this was when private servicers could offer incentives for consolidation so i think i got some immediate incentive plus a 1% rate reduction for 36 on time payments (that us how a bunch of people would get screwed because they would be a day late with one payment or with one form delaying payments and there goes that). Plus a 0.25% auto debit reduction.

 

[waldenwoods]

Question for everyone...

I was considering taking some of my higher-interest-rate federal loans (6.8%, 8.5%) and refinancing into a variable loan, maybe about $25,000 worth, with the goal of paying it off over the next 18 months (my idea is to save money on interest during those 18 months by refinancing, compared to leaving them at their fixed rates and paying them off, because I think that over 18 months, an extra $25,000 is in my budget to pay down loans above the monthly payments I have now) while I know that I'll have an attending salary. Currently thinking about fellowship, maybe mid-2016, so I don't want to refinance all of my loans because I'd definitely not be able to afford payments. Does anyone know if you can refinance to a set loan term (e.g., 5 years) with a private lender and then make additional payments above the set monthly payment to reduce the principal? Or do they make you make payments all five years (or 10 years, or 15 years) as is written in the agreement? Is it worth it to take this strategy? For what it's worth, the loan amount on the 8.5% loan is about $11,000. Thanks in advance.

 

[thesauce]

Question for everyone...

I was considering taking some of my higher-interest-rate federal loans (6.8%, 8.5%) and refinancing into a variable loan, maybe about $25,000 worth, with the goal of paying it off over the next 18 months (my idea is to save money on interest during those 18 months by refinancing, compared to leaving them at their fixed rates and paying them off, because I think that over 18 months, an extra $25,000 is in my budget to pay down loans above the monthly payments I have now) while I know that I'll have an attending salary. Currently thinking about fellowship, maybe mid-2016, so I don't want to refinance all of my loans because I'd definitely not be able to afford payments. Does anyone know if you can refinance to a set loan term (e.g., 5 years) with a private lender and then make additional payments above the set monthly payment to reduce the principal? Or do they make you make payments all five years (or 10 years, or 15 years) as is written in the agreement? Is it worth it to take this strategy? For what it's worth, the loan amount on the 8.5% loan is about $11,000. Thanks in advance.

Nearly every lender will allow you to make additional payments (to reduce the principal) without penalty. That information should be in your refinancing paperwork. If they don't allow it, run away.

 

[Information Underload]

One other thing to consider is that subsidized loans are only subsidized for 3-years into repayment. If you're beyond that 3-year time period, there is no difference between subsidized and unsubsidized loans. Even if you could contribute more to the unsubsized loans, you're going to have to pay off your accumulated interest first before you're making a dent into principal. My guess is you're not going to get much added benefit by directing money at an unsubsized v. subsidized loan for an extended perio fo time.

 

[RangerBob]

Nearly every lender will allow you to make additional payments (to reduce the principal) without penalty. That information should be in your refinancing paperwork. If they don't allow it, run away.

I'm not sure if this is true of the private consolidation banks--they're trying to turn a profit, so it wouldn't surprise me if they had a policy regarding early payments. Would definitely be something to have in writing before signing the dotted line.

 

[thesauce]

I'm not sure if this is true of the private consolidation banks--they're trying to turn a profit, so it wouldn't surprise me if they had a policy regarding early payments. Would definitely be something to have in writing before signing the dotted line.

Even the private ones typically allow it. They know that only a small portion of people will actually pay off the loan early. And even if they do, the lender still makes money up until that point.

 

[RangerBob]

Even the private ones typically allow it. They know that only a small portion of people will actually pay off the loan early. And even if they do, the lender still makes money up until that point.

If true than that's good, but some of these consolidation loan banks are brand new and it still wouldn't surprise me if some of them did charge a penalty/require you to pay the entire loan. (Though this may depend on the state you live in as well--I know at least for auto loans some states require that the consumer be allowed to pay off loans early with no penalty, whereas in other states there's no regulation so you're responsible for the entire amount your loan would have accrued had you paid a normal repayment schedule)

 

[dpmd]

Even if they do allow prepayment most lenders will just pretend that extra payment is a future payment so if you don't notice you could end up with your due date a year from now with a year's worth of interest having been prepaid. Then you have to call and it is a hassle to get it fixed.

 

[thesauce]

Even if they do allow prepayment most lenders will just pretend that extra payment is a future payment so if you don't notice you could end up with your due date a year from now with a year's worth of interest having been prepaid. Then you have to call and it is a hassle to get it fixed.

Correct. You have to make it clear that it's a payment toward principle. However, anyone with the wherewithal to pay a loan off early is going to make sure they do this.

 

[dpmd]

Correct. You have to make it clear that it's a payment toward principle. However, anyone with the wherewithal to pay a loan off early is going to make sure they do this.

I was one of those that didn't realize this was going on and I'm a pretty smart person so it probably isn't the first time it has happened. Even had them misapply payments specified as principal only because they were electronically applied so no one looked at the memo line. Particularly a problem with online bill pay since the address in the system will be the one where stuff is electronically handled. That one was fun because I called every month for them to fix it until someone finally gave me a different address to send it to.

 

[thesauce]

I was one of those that didn't realize this was going on and I'm a pretty smart person so it probably isn't the first time it has happened. Even had them misapply payments specified as principal only because they were electronically applied so no one looked at the memo line. Particularly a problem with online bill pay since the address in the system will be the one where stuff is electronically handled. That one was fun because I called every month for them to fix it until someone finally gave me a different address to send it to.

Sounds like Sallie Mae

 

[dpmd]

Sounds like Sallie Mae

It was either the direct loan servicer or nelnet. It has been a while so I don't remember. Bank of america did a similar thing to me when I was paying down my mortgage though.