Tuesday, December 13, 2011

Tricksy student loans

Today I found something about about my student loans that I think is just diabolical. Or at least it's not what I expected, so I'm going to lay it all down and hopefully we'll all learn something from it.

Let's start from the start. Last month I logged into myedaccount.com (for Federal Student Loan Servicing) only to find that I was a day past due. Now, I had signed up for automatic debiting; it must not have gone through yet. Not to fret, I schedule a manual payment for the full amount, $385.70, or twice my monthly payment (maybe I was a month overdue? :-/). I ignored the warning that for those signed up for auto debit, a change to their system causes the debit to come the day after the due date, but it doesn't count as being late, so don't worry. Sure enough the next day they withdrew $192 or so per the automatic debit.

That's all well and good. I had the cash to cover it and I was planning on making extra payments anyway. But I noticed that the "Next Due Date" updated to 2/7/2012. I didn't think much of it at the time. It's been niggling in my brain ever since, so I checked it out today. Sure enough, $145 of interest has accumulated over the past month, and I didn't have a payment due on 12/7. I have no doubt that interest is going to accrue until my payment date, at which time my payment is going to be paying entirely interest, and some interest will probably even recapitalize to the principal. Unless it doesn't work like that and it's just more interest to pay off the next month. Still.

I had assumed this loan would be like other fixed-term loans like a mortgage or car payment. The monthly payment stays the same, except the amount for principal and interest changes by the month. If you pay extra, it pulls in your final payment date, but you still make a payment every month.

I didn't know another loan arrangement even existed. Maybe it's nice that an extra payment will buy you a month of no payment. However, I consider it diabolical. The thought that interest would accrue for another two months such that the entirety of a monthly payment would go toward interest, reducing zero dollars of principal, is repugnant. Pre-payment results in pushing your loan off into the future, rather than pulling in the date where you will be debt free.

I've never heard of this kind of arrangement. I did some Googling but I don't even know what to search for. Does anyone know what's going on? Is the government trying to be nice? Or do they want to keep this crushing debt load over my head for as long as possible?

Knowing what I know now, I'm going to log in a few times a month and make payments as I have the money. I want to dispatch my $5900 loan first but I'd rather not let the interest build up too high on this one while I'm at it. And it will probably make me feel better to continually chip away at my big block of debt.

UPDATE: Apparently there is a "Do Not Advance Due Date" checkbox option on manual payments. I must have missed it before! From the website:
Unless you advise otherwise, your due date will be advanced one month for every full payment received (see example below). If you do not wish for your due date to be advanced more than a single month, regardless of payment amount made, you need to check the "Do not Advance Due Date" checkbox.
 Now it seems like my creditors are just trying to be nice. I should not be so quick to assume the worst intentions :)


  1. It also strikes me as a bizarre use of the word "advance," no? I would normally think that "advancing" a due date would mean making it arrive sooner, not later. Maybe they think it's useful to make it sound like a good thing, something "advantageous" for the debtor. But as you note, it's quite the contrary.

  2. I still don't quite follow. Is it better to check the do not advance checkbox or not? My wife has some federal student loans that I would like to pay extra on each month so that we can decrease the total amount we have to pay over the lifetime of the repayment. Is this not possible with these federal loans?

  3. It is the same way with my student loans. When I started prepaying, there was an option to say that you didn't want to be in prepayment any more. I don't know if all companies have this option online, but right now it says I don't have to make a payment until 2015 and if I stopped making manual payments it wouldn't deduct the money until then. F-ers just want to accrue interest!!

  4. I found the loan advancing useful when I knew I would probably be leaving my job and needed a buffer while I looked for a new one (it was that bad). I paid extra on my loans and pushed the due dates back a comfortable amount so I wouldn't have to worry about my loan payments. The bummer was that one of my grad school loans didn't advance. Although it helped to pay off more principal, that meant I still had to keep making monthly payments after having already made a sizable payment. They do kind of hide the "Do not advance due date" button when making a manual payment on myedaccount, which sucks for people that don't want/need that option.

  5. Actually advancing the due date is federally required unless you specifically request they not do it (which doesn't benefit you at all). Ex: My minimum due was $250. Say $30 went to interest, and the other $220 went to principal. If I instead paid $500 (twice my payment due), it pushed my due date out by a month, but still only $30 went to interest, and the other $470 went to principal. So the entire overage did go to principal. The next month, if I paid $500 again, maybe $28 goes to interest (because the balance due is lower by $470), and the remaining $472 goes to principal.

    Read more: http://www.city-data.com/forum/personal-finance/1258618-student-loan-extra-payments-not-fully-3.html#ixzz2OQwD0EM6

    This is a great explanation I found online. Not advancing the date doesn't do anything beneficial. Advancing the date is good because if you hit financial difficulties in the future your next due date is pushed way into the future already so you don't have to worry right off.
    I mean, If you only owe $30 in interest and you pay $500 obviously $30 goes to interest and the rest goes to principal they don't just hold onto the extra amount until next month and not apply it until then; they apply it immediately and push the date out because they are required to.