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Today’s Topic: Targeting Payments, Payment Directive and the Debt Snowball.

• “Targeting Payments” – Targeting Payments is the best way, I believe, to pay off your loans faster. With targeting payments, you have choices in how payments are applied. You can apply payments directly to one loan or have your payment spread out among all your loans–it’s up to you. This is easily done by making an online payment. Here’s how:

1. Go to Account Summary, select Make A Payment.
2. Select Target Specific Loans and enter an amount on one loan or divide the payment among all your loans.
3. You cannot pay student loans on weekends or holidays and it takes 2-3 days to process your payment so pay before the due date.
   

Remember, if you pay more than the total amount due and don’t target your payment, your loan servicer will apply the extra amount toward a future bill (assuming you have one), unless you qualify for a $0.00 payment with Income-Driven Repayment. The extra amount is spread across your loans based on the amount due for each loan.

• “Payment Directive” – However, if you want to have all of your future extra funds applied in the same way, you can write to Fed Loan Servicing and provide standing instructions (i.e. payment directive) by Mail, Fax or Email. For an example of the payment directive sample letter, go to Consumer Finance Protection Bureau’s sample letter(DOC).

• “Debt Snowball” – Recently, I was thinking about a Dave Ramsey course I took in the past and Dave recommends the debt snowball. Basically it involves paying off the smallest loans first and applying/stacking that payment onto another payment you are already making to pay it off faster. I was trying to tackle the largest ones first and it seemed overwhelming! Here are Dave Ramsey’s Debt Snowball strategies:

Step 1: “List your debts from smallest to largest.”

Step 2: “Make minimum payments on all debts except the smallest—throwing as much money as you can at that one. Once that debt is gone, take its payment and apply it to the next smallest debt while continuing to make minimum payments on the rest.”

Step 3: “Repeat this method as you plow your way through debt. The more you pay off, the more your freed-up money grows—like a snowball rolling downhill.”

I hope you have learned something new about your student loan debt and just think, you didn’t have to pay an arm and a leg for it! Stay tuned for more topics on student loan debt.

*Picture courtesy of Florida Today and Fort Myers News Press.

Today’s Topics: Future Payments, Paying Ahead, Interest and Capitalization.

Today there is a lot to discuss and with this information you can develop a strategy for how you are going to pay off your student loan debt or at the very least, know what to expect.

I called the Customer Service number again, but this time I asked how is my monthly payment applied to my loan? And, what if I wanted to pay more than the monthly payment–how is that applied? I was shocked at what I heard and you will be too!

“All” extra monies paid above your regular payment are applied to FUTURE PAYMENTS! I was dumbstruck!!! Just as fast as the first Ninja Warrior kick came, he jumped in the air and spun around to deliver a deadly blow that left me dazed and confused. I couldn’t believe what I heard.

Let me break down the different scenarios you have probably already experienced and wondered why your balance hardly changed.

• “Future Payments” – If my monthly payment is $600 and I paid $700, the extra $100 goes toward “future payments”. You probably expected to see a $100 reduction in the principal amount, but that is not how your payments are processed. The extra $100 goes to any outstanding interest first, then principal–UNLESS you have a payment directive on file (covered in volume 3).
• “Paying Ahead” – If my monthly payment is $600 and I paid $1,200 you believe you have paid ahead 1 month. Right? Wrong. Using the same principle above your “extra payment” of $600 goes toward interest first, then “future payment”–UNLESS you have a payment directive on file. **Paying ahead may also negatively affects IDR/IBR plans.
• “Paying Ahead & My Payment Decreased” – If my April monthly payment is $600 and I paid $1,200, my June payment will show a “$0” payment. You’re all excited thinking you’ve been given a reprieve, but not so fast. Interest continues to accrue the day after your payment even though it shows a “$0” payment. You must continue to pay interest or it will capitalize (double).
• “Interest” – Your loans accrue interest every day. Remember, student loans are not simple interest loans! Ask your loan servicer how much you pay in interest “per day”, then do the math. Example $12.50 daily interest x 31 days = $387.50 per month x 12 months = $4,650 a year. This amount increases if you miss just 1 payment or pay late.
• “Capitalization” – Ever wondered why your balance is increasing and/or interest is doubling? It’s because of capitalization. Capitalized interest increases the total balance of your loan amount. How? It’s unpaid interest that is added to your student loan balance when you are in forbearance, deferment or just don’t make payments. Because of “capitalization” you’ll repay much more than you originally borrowed.
• “Capitalization Example” – You borrow $80,000 with a loan rate of 6%. After four years in deferment (you made no payments on your unsubsidized loan while in school) your interest of $21,600 is now added to the principal balance of your loan after your grace period ends and repayment begins. Now instead of owing $80,000, you owe $101,600. To make matters worse, you will be paying “interest on top of the interest of your loan!” The same principal applies if you miss a payment.
• “No Payment OR Payment Doesn’t Cover Interest” – If you fail to make a payment during the next scheduled payment, or the payment made does not cover the interest, that is when the accrued interest would capitalize and be added to the principal balance of the loan.

The confusing part for the borrower is that they think they have paid ahead when in reality it’s like the payment was sucked into the black abyss and you’ve got nothing to show for it. Furthermore, you still have to pay the next month’s payment too (you know the one that you thought you already paid) or your interest will double. You cannot afford to miss one payment!

Don’t even think about forbearance or deferring your loans either, because once the interest capitalization train begins to roll it will quickly get out of control and then you’ve got a train wreck on your hands. Basically, once you get off of deferment or forbearance, your first few months or more of payments will be applied to the interest that you have accrued and “none will be applied toward principal” until you have paid off all the interest owed first.

When most people think of interest, they think of a simple interest loan where you can pay ahead and your interest is fixed each month. To help you really know how to tackle your student loan debt, ask your student loan servicer for an amoritization schedule for your plan. You may also find an amoritization calculator online, but you need to make sure it uses capitalization versus simple interest.

There was a lot of information covered in this post, however, don’t despair as good news is on the horizon. Volume 3 will be coming out shortly–stay tuned!

*Photo courtesy of Dave Granlund.com

*A Must Read for Anyone with Student Loan Debt. Volume 1

Student loan debt is an issue near and dear to my heart. Why? Because I have a large amount of debt accumulated in my Master’s Degree program. Yes, I knew the amount I was financing each semester but I thought I would be able to work hard and pay it off in a few years. Unfortunately, my dream turned into a nightmare!

My first smack in the face came when my new monthly payment was calculated at a whopping $1,000 per month. I was shocked! I called customer service and told them that I needed money to live too or else I would become homeless. I was told that they don’t take into account rent, utilities or existing bills. This is your new payment–like it or not.

I fully anticipated paying off my student loans methodically by paying a little extra principal each month. (You know, like you do for your monthly mortgage to reduce the number of years.) This new amount, however, blew that plan out of the water. Then I asked how much of that payment is going toward principal versus interest? The customer service agent said about $150 spread out over 12 different loans. A quick math calculation in my head make the situation even worse. I was only paying about $12.50 per loan towards the principal amount. I realized that I would never be able to repay these loans off despite how much I sacrificed. As fast as a ninja warrior could kick, I was hit again. With that kick, came the sudden realization that my monthly interest payment was about $800 each month and I would carry these loans well into my retirement years!

I was angry and depressed about my future. All the joy I anticipated knowing that my Master’s Degree would allow me to earn more money went right out the window. Don’t they know it takes more than six months to transition from a lower level position to a higher one? Especially when the current company you are with offers no room for advancement let alone a raise for your educational attainment.

What could I do? My answer came through lots of research online and asking a lot of questions. Look for Student Loan Sharks – Volume 2.

*Picture courtesy of Florida Today and Fort Myers News Press.