Student Loan Advice

[WoodysGirl]

I must have misread that -- some banks broker consolidation (or buy consolidated loans) so that's what I thought she was talking about

It was in the original post...

Someone at work told me that he felt like he wasn't getting anywhere while paying back his loan (because of interest), so he went to his bank, got a loan, paid off the student loan, and then started repaying the bank back.

Is this a good idea? It seems like one to me.

 

[LittleRed212]

That's almost as bad... in that you're still probably chiefly paying interest then. I'm just saying make sure you stipulate that the extra needs to go towards principle.

Little Red,
The key here is the phrase, "unless you tell us otherwise." So when you send in your extra amount per month, make sure you stipulate that it should ONLY apply towards the principle. If you don't stipulate, then those bastids will put it towards the interest.

If you have a monthly loan payment form or coupon that you send in with your payment, they often have a space for listing "additional principle" that you are including.

How do I do that? I pay my bills online.

I have searched the website and I couldn't find anything on how to stipulate that I want the extra money to NOT go towards my next payment, but for it to go to my principle balance instead.

I emailed them. Hopefully that'll work.

 

[Danny White]

How do I do that? I pay my bills online.

I have searched the website and I couldn't find anything on how to stipulate that I want the extra money to NOT go towards my next payment, but for it to go to my principle balance instead.

I emailed them. Hopefully that'll work.

If you're intent on paying extra on your principle, maybe just do it in one lump sum once a year. Then you can mail it in with a letter saying that it's to go towards principle.

 

[AbeBeta]

That's almost as bad... in that you're still probably chiefly paying interest then. I'm just saying make sure you stipulate that the extra needs to go towards principle.

Can you explain to me why it mattesr whether the $$ goes to interest or principal (in terms of being directed one way or another). E.g., I owe 1000$with a 12% interest rate. My payment is $50 a month. In month 1 my pricipal plus interest gives me a balance of $1100. That minus $50 is $1050. Say I pay $100 instead. My balance then is $1000. As I see this, they both become part of the balance on which I pay interest the next month.

 

[StanleySpadowski]

Can you explain to me why it mattesr whether the $$ goes to interest or principal (in terms of being directed one way or another). E.g., I owe 1000$with a 12% interest rate. My payment is $50 a month. In month 1 my pricipal plus interest gives me a balance of $1100. That minus $50 is $1050. Say I pay $100 instead. My balance then is $1000. As I see this, they both become part of the balance on which I pay interest the next month.

IF they apply the overpayment to the next month's payment rather than principle, some lending institutions don't apply that overpayment until the due date of the next payment.

Suppose you owe that $1,100 with the $50 dollar payment. You send $100. $50 is held until the next due date then applied. Instead of interest accruing on $1,000, it accrues for the month on $1,050. It doesn't sound like much but it does add up.

 

[AbeBeta]

IF they apply the overpayment to the next month's payment rather than principle, some lending institutions don't apply that overpayment until the due date of the next payment.

Suppose you owe that $1,100 with the $50 dollar payment. You send $100. $50 is held until the next due date then applied. Instead of interest accruing on $1,000, it accrues for the month on $1,050. It doesn't sound like much but it does add up.

I see. I've dealt with a ton of loans and never once has that been the case -- but it is good to be aware that is possible.

 

[Danny White]

Can you explain to me why it mattesr whether the $$ goes to interest or principal (in terms of being directed one way or another). E.g., I owe 1000$with a 12% interest rate. My payment is $50 a month. In month 1 my pricipal plus interest gives me a balance of $1100. That minus $50 is $1050. Say I pay $100 instead. My balance then is $1000. As I see this, they both become part of the balance on which I pay interest the next month.

What you say makes sense. I admit I'm not an accountant or anything like that. I was just always told that paying down your principle was the fastest way to shorten the life of your loan.

My main point to Little Red, however, is to think about skipping the extra payments on this low-interest loan and use that money on higher yield activities.

Four things she should consider are:

1) maxing out a 401(k) plan if her employer offers one... especially if there's a matching component.

2) paying off all high-interest credit card debt.

3) paying off any other loans (car, etc) that are higher interest rates than her student loan... given the rate of her student loan, I'd expect ANY other loan would have a higher rate.

4) investing in a mutual fund or even a CD that has a substantially better rate than her loan rate.

 

[AbeBeta]

My main point to Little Red, however, is to think about skipping the extra payments on this low-interest loan and use that money on higher yield activities.

That I would absolutely agree with. Some folks get really hung up on being in debt. But there's good debt (a mortgage) and bad debt (credit cards) -- student loans are in between.

 

[theebs]

Can you explain to me why it mattesr whether the $$ goes to interest or principal (in terms of being directed one way or another). E.g., I owe 1000$with a 12% interest rate. My payment is $50 a month. In month 1 my pricipal plus interest gives me a balance of $1100. That minus $50 is $1050. Say I pay $100 instead. My balance then is $1000. As I see this, they both become part of the balance on which I pay interest the next month.

Look at the post i have on the second page, the ammortized results for little red I did last night.

That will explain it. Compound interest is a real kick in the pants.....

that is the reason banks are rich, and people owe them everything..compound interest.

 

[AbeBeta]

Look at the post i have on the second page, the ammortized results for little red I did last night.

That will explain it. Compound interest is a real kick in the pants.....

that is the reason banks are rich, and people owe them everything..compound interest.

Yeah -- I understand that -- but I didn't understand how getting your bank to apply the extra $50 to principal instead of or before to interest made any difference as you are paying interest on both in the future. Spadowski indicated that some lenders will hold that extra for a month -- but in my experiences it isn't common.

 

[StanleySpadowski]

That I would absolutely agree with. Some folks get really hung up on being in debt. But there's good debt (a mortgage) and bad debt (credit cards) -- student loans are in between.

There is no such thing as a "good" debt. A home mortgage isn't as bad as most other forms of debt but it's much better not to have one.

 

[AbeBeta]

There is no such thing as a "good" debt. A home mortgage isn't as bad as most other forms of debt but it's much better not to have one.

Theoretically yes -- but having a mortgage is usually better than say, renting and not owning a house.

 

[Danny White]

There is no such thing as a "good" debt. A home mortgage isn't as bad as most other forms of debt but it's much better not to have one.

Well, let's say you have $300,000 in a mutual fund and are getting an annual return of 15% on it. Then you want to buy a home that also costs $300,000. What are you better off doing?

Cashing out your mutual fund and using it to buy the house outright?

Or keeping your money in the fund, earning $45,000 a year for you, and taking out a mortgage at around 6% interest (which is also tax-deductible)?

In that case I'd argue for incurring the debt. In reality, even though you're incurring an individual debt, you are not "in debt" in the big picture as you'd have a positive cash flow.

 

[StanleySpadowski]

Well, let's say you have $300,000 in a mutual fund and are getting an annual return of 15% on it. Then you want to buy a home that also costs $300,000. What are you better off doing?

Cashing out your mutual fund and using it to buy the house outright?

Or keeping your money in the fund, earning $45,000 a year for you, and taking out a mortgage at around 6% interest (which is also tax-deductible)?

In that case I'd argue for incurring the debt. In reality, even though you're incurring an individual debt, you are not "in debt" in the big picture as you'd have a positive cash flow.

You can do the math a thousand ways to make it seem like debt isn't that bad and yes, in theory you'd be further ahead but I live by a simple rule - If you don't have the money to buy it, don't buy it.

It's served me remarkably well considering I "retired" in my 20's. Course it helps to get in then out of the tech boom at the right time.

 

[Smith22]

You can do the math a thousand ways to make it seem like debt isn't that bad and yes, in theory you'd be further ahead but I live by a simple rule - If you don't have the money to buy it, don't buy it.

Good idea, but the average person would never own a house.

 

[Smith22]

note: some loans actually PENALIZE you for paying them off EARLY. make sure your loan has no such language.

I have a 15 year mortage (avoid getting whacked by interest for 30 years) and I also pay extra principal quite often, sometimes $100, sometimes $50, sometimes $25, and it really makes a difference.

 

[AbeBeta]

You can do the math a thousand ways to make it seem like debt isn't that bad and yes, in theory you'd be further ahead but I live by a simple rule - If you don't have the money to buy it, don't buy it.

That's silly -- house car, both no-goes under that idea. It is nice that you are rich but you have to realize your advice doesn't help working folks. Instead it makes them think they shouldn't do anything -- like buy a house - unless they have several hundred thousand dollars lying around.

 

[AbeBeta]

note: some loans actually PENALIZE you for paying them off EARLY. make sure your loan has no such language.

I have a 15 year mortage (avoid getting whacked by interest for 30 years) and I also pay extra principal quite often, sometimes $100, sometimes $50, sometimes $25, and it really makes a difference.

However, in my experience, most student loans don't come with early payoff penalties - that's usually just for secured loans (mortgage, car, etc.).