FEDLoans - Can't pay principal?

[Anonymous]

Hi All: 

One of the things I noticed on my credit report was that it said the balance of my installment loan was still too high. My installment loan, I am assuming is my student loan since all other debt is CC under 10-19 percent with one wayward card that I will be working on shortly. Anyhow, I started looking at my payments that I have made toward FedLoan in the amount of 482.54 on a debt of 88000 dollars. I wanted to see what adding an extra 1500.00 per month would do as far as length of time. To my shock I noticed that my principal has not decreased a single penny since starting this loan payment with FedLoan in Feb of this month. 

I looked throught the site to see how I could start making payments towards the principal instead and it says that "Any extra payments will go to interest accured and then towards the principal." 

What does this mean, exactly? Interest for that billing cycle? Interest for the whole loan? Does anyone know how I could possibly start paying this loan down or will I have to just suck it up and pay 6.25% interest on a 88k loan before I can even get to my principal? 

My initial thought was to pay it down half way and see if I could get a private lender for the rest just because FedLoan has been such a nightmare. Is there a magic window of dates that I could pay an extra payment toward principal? 

I am in the process of buying a house and want to get rid of student loans so I can focus on mortgage since I know that I'll never be able to discharge a student loan anyway. This student loan is set for 10 years of monthly payments with debt forgiveness of remaining balance at the end of the ten years but will increase from 483 to a max of 900 as the time increases. Any help with paying this sucker down would be helpful if not in full, at least to raise credit score a bit. 

[Anonymous]

I also was reading on their site regarding interest and I am not sure if I did the math correctly but there seems to be 11 dollars that is unaccounted for each month. 

 After researching on the website regarding interest it indicates that I should use the following formula to calculate interest on the loan:

Interest Rate x Loan Amount/365.

I did that by plugging in my interest rate and balance:

6.50% X 87,994.34/365

.065 X 87,994.34/365

5719.6321/365=15.670

15.70 is my daily interest rate if we round 15.670 up, correct?

So, in a 30 day billing cycle my total interest is 471.00, correct? Each month, I pay $482.54 which should leave a small balance of $11.54. Where is this $11.54 going? Why is in not going to my principal balance?

[SCF]

What payment plan are you on?  It sounds like you are maybe on an income-based payment plan, or a graduated plan?  It is not unusal for the payments on those plans to only cover the accrued interest, or in the case of IBR, to not even cover that interest if your income is low relative to your loan balance.  Interest is accrued daily, so whatever day your payment is processed that payment will go to pay interest first, and then the rest will be applied to principal.

I'm not sure if your formula is correct (I've never been one for that type of math), but if you're concerned that your payments aren't being applied properly I would contact your lender.  I've never used FedLoan, but Nelnet has a nice "loan status" type statement that will show me exactly how my payments have been applied.  Maybe FedLoan can provide you with something similar?

Finally, the good news is that the balance on your installment debt is a very small portion of your score compared to other factors like age of your accounts, utilitization on revolving accounts and payment history.  Paying extra on your student loan is a great decision financially, but you'll see more benefit to your credit score by focusing on CC util, making payments on-time, and letting accounts age.

[Anonymous]

Hi There: 

Yes, I am on IBR and supposedly after ten years any remaining debt is excused although this seems to change as much as the wind. One day I am signed up and the next they say I am not. FedLoan, that I can tell has a column for principal and interest and shows that all of my payment is going toward interest however; that seems odd because according to the formula on their website the math isn't adding up. My payments are due every month on the 15th and I pay them early on the first of the month they are due. So, if I am understanding this correctly and it's interst for each day, then there should have been something paid to the princiapl from feburary correct? My first payment was sent on the 13th then the next month on the first allowing for only fifteen days of interest versus the thirty? 

So, how can I pay down the principal? Do i make an extra payment immediatley after the inital payment? 

[Anonymous]

A lot of lenders seem to have it set up such that any payment you do online will go to interest or to future payments and the only way you can have it apply to principal is to send a check in the mail with the directive to apply it towards the principal.  If I remember correctly, federal loans are supposed to allow you to apply extra money towards principal without penalties, but I might be mistaken.  But they like to make you jump through hoops to do it.  Nelnet, for example is notorious for that with Quikpay only going towards future payments.  Look at the master promissary note you signed to see the exact details. 

[Anonymous]

Okay, thanks so much for the information. I plan on paying these off ASAP. So sick of dealing with these guys!

[Stylez]

Your interest probably compounds daily. So your balance is 87,994.34 with a 6.5% annaual interest rate. 0.00017808 is your daily interest rate. 1.00017808 * 87,994.34 = 88,010.01. The 88,010.01 represents your balance with one day's worth of accrualy. On the second day, it will be calculated as follows; 1.00017808 *88,010.01 = 88,025.08. Because each day's interest will be based on a slightly higher amount, your daily interest will be slightly higher everday. That's probably what's accounting for your discrepancy. Create an amortization table in Excel to find out how much interest accrues during the month. To pay the loan down faster, you have to send in a payment that is higher than the accrued interest. Whatever you pay above the accrued interest will go towards the principal. As the prinicpal goes down, obviously so will the amount of accrued income.

[Anonymous]

Thanks for the explanation. I guess I'm confused because when I try to make a higher payment it says it will go to interest only. So I think my question is.... Are they making me pay off all interest first no matter if I pay more than requested or do I send more via check each month and specify how to apply it? I'm sorry... Finances arent my bag. I'm learning but I feel so stupid that I'm in my 30s and don't know this stuff.

[Stylez]

You need to find out how much you have in accrued interest. Many of these loans accrue interest while you're in school and defer it until you start to pay the loan back. So if you have say $10,000 in accrued interest, and your payments are $500 a month, you won't be paying down your prinicipal unless you pay off the $10,000 in accrued interest first.

[Anonymous]

---

@Stylez wrote:

You need to find out how much you have in accrued interest. Many of these loans accrue interest while you're in school and defer it until you start to pay the loan back. So if you have say $10,000 in accrued interest, and your payments are $500 a month, you won't be paying down your prinicipal unless you pay off the $10,000 in accrued interest first.

---

+1

This is what happened to me. I had to call and ask but I eventually found out that after I paid like $4k in accrued interest, extra payments would start going to the principal. You just have to find out what that tipping point is and get past it.

To make it easier, I asked them to increase my minimum payment so I wouldn't have to request where to apply extra every month. Now the "extra" goes to principal and I don't have to do anything.