3 Things You Should Know About Paying Extra On Student Loans
Keith and I were moving along with our debt snowball and making some real progress. We had paid off all of our non-student loan debt and were finally feeling like we were getting traction.
Keith's employer provided their staff with the opportunity to apply for student loan repayment every year. We always applied and gladly accepted whatever amount was offered.
One year, after receiving the repayment amount, I was looking at our statement. Because we had made such a large payment, our statement indicated our next payment was not due for several months.
"Cool!" I thought. Since we didn't need to make a payment on this student loan, we moved the allocated amount to the other student loan. It was the smaller loan and we thought we could knock it out before the next payment on the first loan was due.
Not a good move. The next month, we realized that while we still did not have a payment due for several months, we had accrued interest on the loan! "What?!" How can we owe interest when the next payment is not due for months???!!!
Welcome to the world of misinformation offered by student loan companies. Below is what I discovered when I called customer service and spoke with a manager.
1. Student loan interest accrues daily. As long as there's a balance, interest will accrue. ALWAYS make at least the minimum payment on the loan until it becomes the focus of the debt snowball. At that point, allocate all available money to the loan until it's paid in full. When your loan is postponed for any reason (deferred, in default or forbearance, disaster relief assistance, etc.), interest continues to turn over daily.
NOTE: Interest will continue to accrue on your loan, even while you're still in school. Just because it's deferred for educational reasons, does not mean interest is not accruing. The only caveat to this rule is a deferment on a federally subsidized loan. Those will not accrue interest while they are deferred.
2. You can never "prepay" a student loan. This is a tactic used to keep you from making a payment, thereby increasing the amount of money available to accrue new interest. Navient (formerly Sallie Mae) is notorious for this.
When you make more than the minimum payment, they push your next payment date out to match the amount of your most recent payment. What do I mean by this?
Let's say you send in a payment of $300 and your monthly minimum payment is $100. They will tell you that your next payment amount is not for another two months (this month, plus the next two months at $100/month).
I know what you're thinking..."That's illegal, right?!"
Nope! It's written as clear as day on their website: "We will advance your payment due date by the number of full payments that are covered by any over payment — unless you instruct us to do otherwise."
It's not illegal, because they are telling you that they going to do it! AMAZING!
Needless to say, we instructed them to do otherwise. Now our payment date is always the next month, regardless of any extra payment we send. An over payment is still applied according to their formula (click here for their payment formula), but there is no longer any confusion as to when the next payment is due.
3. Making lots of small extra payments saves you money. As we work with our financial coaching clients and Financial Peace University attendees, Keith and I always make sure they know to make their extra student loan payments as the money becomes available instead of holding it all to make one larger payment.
Since student loan interest accrues daily, making small extra payments throughout the month saves on the amount of interest accrued.
Remember...your payment is applied to interest and fees before principle. Once all of the accrued interest is paid, it resets and starts accruing again on the smaller balance. The more times you can reset it to zero, the less overall money you pay in interest. We have made as many as eight extra student loan payments in one month, with amounts as small as $25.
These are just a few ideas to help you get started (or keep going) on the student loan portion of your debt snowball. It's often frustrating for many to realized how much they don't know about the student loan process.
Unfortunately, it's all too common for most student loan borrowers. We did not discover any of this information until we started dealing with the craziness of student loan repayment and literally reading the fine print.
Proverbs 10:4 tells us that "a lazy person will end up poor. But a hard worker will become rich."
Financial freedom can never happen as long as we keep putting our heads in the sand and choose to not educate ourselves on our rights and responsibilities.
We must choose to be informed consumers.
So many people we meet are bogged down by student loans, but are not sure how to get out from under them. The key is to look them in the face and take it one step at a time.
What about you? Are you weighed down by student loans (or know of someone who is)? What's your plan to get rid of them? How will this year be different in terms of your knowledge of your financial situation?
My prayer is that you don't think your loans are too overwhelming to overcome.
All you need is a plan and action!
Let this year be the one where you take back your future by tackling the mountain called student loans!
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Thanks for hanging out with me!
See you next week! In the meantime...be well...be encouraged.