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MMB85
Posts: 163
Registered: ‎06-23-2013
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Which Student Loan pay off approach should I use?

Alright, for some reason, I do not have to make a payment on my loan this month. But, I still am. 

 

To generalize, I have about 26500 in principal and 1500 in unpaid accrued interest. So, daily interest is accruing on about $28,000.

 

In my account, it is not simply just one loan that I am making payments on. It is considering each semester I activated the laon as a complete separate loan. For instances, on my credit report, instead of having 1 federal student loan open, I had 8. Technically on my report I have 16, because it switched carriers a couple years ago, closed the previous 8 accounts and re-opened them as separate accounts. So on my report it is something like 8 open accounts and 8 closed accounts. Also, I think there was a semester or 2 where I withdrew a part of the loan, then a month or so later I decided to take a little more out, therefore, it treated that as 2 separate loan accounts because last time I saw my report, there were 20 something loan accounts, which half being opened - half being closed. 

 

Does having all those accounts on my record hurt my credit when in fact it realy is just one loan account? Is that common what is going on with my account and credit report?

 

This is how my credit report/info looks

 

4 credit cards

~10 open loan accounts

~10 closed loan accounts

 

I wish it looked like this:

4 credit cards

1 open loan account

 

Even though all my loans are through the same instituion, does it make a difference if it is shown as 1 account vs as 20 like it is on my report?

 

ANYWAYS, back to the original topic of this post. 

 

This is what my acount looks

 

05/18/2011Direct Sub Stafford Loan       -Paid In Full$0.00
05/12/2011Direct Unsub Stafford Loan  -Paid In Full$0.00
05/03/2011Direct Sub Stafford Loan       4.5%Repayment$936.17
04/07/2011Direct Sub Stafford Loan       4.5%Repayment$936.17
03/24/2011Direct Sub Stafford Loan       -Paid In Full$0.00
12/03/2010Direct Sub Stafford Loan       4.5%Repayment$3,042.80
04/07/2010Direct Unsub Stafford Loan   6.8%Repayment$2,279.43
10/21/2009Direct Sub Stafford Loan       5.6%Repayment$5,606.25
08/25/2008Direct Unsub Stafford Loan   6.8%Repayment$9,291.44
08/17/2007Direct Sub Stafford Loan        6.8%Repayment$4,525.28

 

Here are two payment approaches I was considering:

 

Plan A:  

Pay off the 5/3/11 and 4/7/11 loan of 936.17 each so that those accounts would be paid in full and I will have 2 less open accounts reflected on my credit report. 

The problem (minor or major?) is that those two accounts only have $17 of accrued interest each on them, and there is a total of ~$1500 accrued interest.

 

Total payment = $1872

 

Plan B:

Don't knock out those two accounts, but rather pay off all of the current accrued interest of $1558. 

With this approach, I will be paying $300 less than plan A, leaving 7 open loan accounts rather than 5 if I went with plan A, but I would of course pay off the current accrued interest. That would ultimate result in less interest accrued in the long run, right?

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SCF
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Registered: ‎06-09-2008
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Re: Which Student Loan pay off approach should I use?

Your situation is very normal - this is just how student loans are disbursed, and it is also normal for them to occasionally switch servicers, resulting in a report like yours.  It won't cause you any issues or raise any eyebrows on a manual review unless the person looking at it is very unfamiliar with student loans.

 

It is a good idea to pay down interest before it capitalizes into the principal of your loan - that way you aren't paying interest on the interest.  I would pay off the interest and then put the rest of your payment toward the principal of the loan with the highest interest rate.  Continuing to direct any payments over the minimum to the highest interest rate loan will save you the most in the long run.

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dbutz1109
Posts: 91
Registered: ‎11-12-2013
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Re: Which Student Loan pay off approach should I use?

SCF pretty much nailed it on the head. Student loans disburse this way and it won't hurt you. Definitely pay the interest first...you're already giving the gov't enough interest in my eyes so why give them interest on interest? Once the accrued is paid down just attack the largest amount with the highest rate (looks like one of the 6.8% loans.) Just keep dumping in what you can and try to stay ahead on the loans. Should you ever hit a month where your funds are needed elsewhere, this "paid ahead" status can be helpful.


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Jazzzy
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Registered: ‎07-29-2009
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Re: Which Student Loan pay off approach should I use?

You could consider consolidating your loans. I believe they do a weighted average on the interest rate, so you would be paying the same interest.

 

I consolidated mine because it looked a lot like yours. I had different loan servicers. I was afraid I would accidentally miss a payment on one of them...so I consolidated into one. I did mine through Direct Loans, and it was painless.

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MMB85
Posts: 163
Registered: ‎06-23-2013
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Re: Which Student Loan pay off approach should I use?


Jazzzy wrote:

You could consider consolidating your loans. I believe they do a weighted average on the interest rate, so you would be paying the same interest.

 

I consolidated mine because it looked a lot like yours. I had different loan servicers. I was afraid I would accidentally miss a payment on one of them...so I consolidated into one. I did mine through Direct Loans, and it was painless.


I thought consolidating is when you have outstanding loans with different loan services and are just trying to get it bunched into one?? Mine is all with one service and has always been. It is just that they have treated each withdraw (Each semester) as a completely separate loan. I make one payment per month and a set % must be applied to each one of the loans, and of course I can make higher than that required minimum. I can still consolidate that?

 

Also, one thing I am very confused about. I still don't get the whole "payoff your accured interest first. You don't want to be paying interest on interest"

What difference does it make? That accured interest is notwpart of your total outstanding loan. So, if you apply your payment to that or to your beginning principal, what difference does it make? It all amounts to the same exact thing.

 

For example:

Say my total balance is $26,000. And $1,000 of that is unpaid accrued interest. Interest is accruing on your total outstanding balance, which is everything. 

 

So, say out of that $26,000 I applied $300 to the principal and not a penny towards accrued interest. The new balance would now be $25,700 and interest will be accruing on that. 

 

What is the difference between that, and this:

 

Say now out of the $26,000 I apply the whole $300 to the accrued interest. After that payment, my balance is now $25,700 and interest will now be accruiing on that. 

 

So what is the difference? Why do people say "may sure you pay accrued interest first. you don't want interest to be accruing ontop of interest".? It is not like the interest rate goes up whenever it is being applied to accrued interest. That accrued interest is not part of your total outstanding loan and that is what your interest will be accruing on. So if I make an X amount of payment this month, regardless if it goes towards the principal or unpaid interest, it is will going to deduct the same amount of money and both scenarious will have my ending balance being the same, and in both scenearios interest will be accruing on the same amout and therefore resulting in the same interest accrual. 

 

 

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SCF
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Re: Which Student Loan pay off approach should I use?

When your loans are deferred, interest accrues seperately from the principal of your loan, based only on the principal amount of the loan.  If you pay off that accrued balance before repayment begins, the interest will not be capitalized into the loan.  If there is accrued interest outstanding when it enters repayment, capitalization folds that interest into your principal and interest is now accruing based on the total balance.

 

It's like there are two pots before you enter repayment - principal and interest, and they get poured into one pot once repayment begins.

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MMB85
Posts: 163
Registered: ‎06-23-2013
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Re: Which Student Loan pay off approach should I use?


SCF wrote:

When your loans are deferred, interest accrues seperately from the principal of your loan, based only on the principal amount of the loan.  If you pay off that accrued balance before repayment begins, the interest will not be capitalized into the loan.  If there is accrued interest outstanding when it enters repayment, capitalization folds that interest into your principal and interest is now accruing based on the total balance.

 

It's like there are two pots before you enter repayment - principal and interest, and they get poured into one pot once repayment begins.


Okay, I get that. But, I am not in that category. I've been out of school and paying on my loan for 3 years. Plus, what you explained is a much better situation to be in - Interest is only accruing on the principal and not balance. Just don't get why people have been telling me to pay off your accrued interest before touching the principal. Websites and "Experts" have been saying that too. But it makes absolutely zero difference wether you apply your monthly payment to the interest or the principal, it is all the same. They are no longer split. They are one. 

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MMB85
Posts: 163
Registered: ‎06-23-2013
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Re: Which Student Loan pay off approach should I use?

Also, something very weird. Last month when my statement cut, it said my payment is $0.00. Thought that was odd. I sitll made a payment on it. Today the new statement cut and it once again says my minimum payment is $0.00. My loan is active and not in deferment. I am on the Income Based repayment plan and since starting it my min payments have been around $150. Now back to back month of it saying I owe nothing this month.

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SCF
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Re: Which Student Loan pay off approach should I use?

Two possiblities - the advice is directed at people who are coming off a period of deferment or forbearance, or, they are reminding folks that is important to ensure your loan payment covers your interest + also reduces your principal.  With income-based payment plans, it is possible to pay less than the interest owed for the month and have the loan balance grow in spite of making monthly payments.  This can be OK if you are planning to take advantage of some type of loan repayment or forgiveness plan, but it is still risky (what if you don't qualify?).

 

As far as the $0 due, it sounds like you are paid ahead on your loans.  When you pay extra, it is automatically applied to the next month's payment, potentially reducing it to $0.  If you want the extra payments to reduce your principal, you have to tell the servicer that.  Most of them have a place to check on your payment stub, or to make that selection when you pay extra online.

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MMB85
Posts: 163
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Re: Which Student Loan pay off approach should I use?

[ Edited ]

SCF wrote:

Two possiblities - the advice is directed at people who are coming off a period of deferment or forbearance, or, they are reminding folks that is important to ensure your loan payment covers your interest + also reduces your principal.  With income-based payment plans, it is possible to pay less than the interest owed for the month and have the loan balance grow in spite of making monthly payments.  This can be OK if you are planning to take advantage of some type of loan repayment or forgiveness plan, but it is still risky (what if you don't qualify?).

 

As far as the $0 due, it sounds like you are paid ahead on your loans.  When you pay extra, it is automatically applied to the next month's payment, potentially reducing it to $0.  If you want the extra payments to reduce your principal, you have to tell the servicer that.  Most of them have a place to check on your payment stub, or to make that selection when you pay extra online.



EDIT:

 

If you saw my original post, please disregard. I appologize. I got confused with what you said and replied with something based off that.

 

But I get what you are saying. Yes, my month payments have been more than the monthly interest accrued. I think this past month the interest that accrued was like $72 or something. And my previous monthly required min payments based on my Income Based repayment have been like $125. And the reason you gave why my past 2 statements have had $0 minimum payment makes sense. I have always been making 2-4x the min payment. I am on the IBR plan just for security purpose. But, I can definitely afford to pay more than $125 a month. My monthly income can't afford it but I have a lot of money saved up that I have been applying to my loans. 

 

And I guess my monthly min required payment is going to be $0 for the next 2 years since I've regularly been going $300 on a $125 min payment and today plus last month I paid a combined $2500 lol.  Last month I paid $1600 on my loan because that was how much accrued interest was and I asked if I should pay that off first or "Pay in full" one of my loan accounts which two of them were $900 each. I was told to pay off interest first because I don't want interest to be accruing ontop of interest lol but I later found out that means nothing and makes no difference. So today I maid a $934 payment on one of my loans so that it would be Paid in Full and I would then only have 6 open accounts. Next month I am going to do the same with the other one. Would rather get those paid off and closed before focusing on my bigger  loand accounts.

 

So am I able to consolidate and possible get a lower %? I thought it was only for when you have loans through different services and can't be done in my situation since my loans are all through the same service.


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