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 :)