Author Topic: Will I get dinged for paying down loans in this way?  (Read 4505 times)

KidneyMD

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Will I get dinged for paying down loans in this way?
« on: December 22, 2014, 09:02:21 AM »
Hey all,

Right now I'm doing income-based repayment for my student loans (loan service is Nelnet) and making the minimum monthly payments. Assuming that I start to create enough of a buffer that I can afford to pay them down more quickly, specifically targeting the higher interest loans first, will the loan servicer take note of this and switch me to a standard repayment plan? I'm not talking about a situation in which I suddenly have $50k to pay down one or two of my loan groups in full, but rather just some extra cash (~4-5k/yr) to chip away at the higher interest loans.

rubybeth

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Re: Will I get dinged for paying down loans in this way?
« Reply #1 on: December 22, 2014, 09:05:39 AM »
It shouldn't matter how much you pay. You qualify for your repayment based on your income, not based on your payment amounts.

I'm guessing your repayments are currently paying more than the interest on your loans, otherwise it would be a better strategy to let them be forgiven if you qualify for that.

mlejw6

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Re: Will I get dinged for paying down loans in this way?
« Reply #2 on: December 22, 2014, 09:18:11 AM »
It wouldn't be advantageous for them to switch you to standard repayment without your consent. Presumably, you chose income-base repayment because you wanted a smaller payment, allowing them to collect more interest from you over the life of the loan. If they switch you to standard, they would get less money overall. I doubt they would switch you even if you did pay extra.

KidneyMD

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Re: Will I get dinged for paying down loans in this way?
« Reply #3 on: December 22, 2014, 11:49:07 AM »
Thanks for your thoughts on this rubybeth and mlejw6. This concern initially came up because I have a grandmother who is currently trying to deplete her assets by gifting money to family members, and with whatever money she may give me I would put towards paying off loans. I don't want this to be treated as "income" that the loan servicer would learn about.

Spondulix

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Re: Will I get dinged for paying down loans in this way?
« Reply #4 on: December 24, 2014, 01:55:38 PM »
Nelnet customer service is great, so call or drop them an email. One thing I have found is that you can't make principal-only payments, so any extra payments just push back the due date of the next payment.

Gin1984

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Re: Will I get dinged for paying down loans in this way?
« Reply #5 on: December 24, 2014, 02:51:56 PM »
Nelnet customer service is great, so call or drop them an email. One thing I have found is that you can't make principal-only payments, so any extra payments just push back the due date of the next payment.
I don't think that is legal.

Spondulix

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Re: Will I get dinged for paying down loans in this way?
« Reply #6 on: December 25, 2014, 12:02:12 AM »
Nelnet customer service is great, so call or drop them an email. One thing I have found is that you can't make principal-only payments, so any extra payments just push back the due date of the next payment.
I don't think that is legal.

From their website: "Per regulations, all payments are applied to fees first, then interest, and finally principal unless your current repayment plan is Income-Based Repayment. In this situation, your payments would first be applied to interest, then to fees, and finally to principal. If you send in a payment greater than the minimum amount due, the additional amount will automatically be applied to your principal balance after all outstanding interest and fees are paid. Nelnet cannot apply payments in a way that does not conform to regulations."

So yes, it's applying towards principal, but it's not a principal only payment (the way you can do with a mortgage). I had a car loan with Toyota a few years ago that was exactly the same - it's how simple loans work. In the long run, you are saving on interest because you are shortening the length of the loan.

Gin1984

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Re: Will I get dinged for paying down loans in this way?
« Reply #7 on: December 25, 2014, 10:07:16 AM »
Nelnet customer service is great, so call or drop them an email. One thing I have found is that you can't make principal-only payments, so any extra payments just push back the due date of the next payment.
I don't think that is legal.

From their website: "Per regulations, all payments are applied to fees first, then interest, and finally principal unless your current repayment plan is Income-Based Repayment. In this situation, your payments would first be applied to interest, then to fees, and finally to principal. If you send in a payment greater than the minimum amount due, the additional amount will automatically be applied to your principal balance after all outstanding interest and fees are paid. Nelnet cannot apply payments in a way that does not conform to regulations."

So yes, it's applying towards principal, but it's not a principal only payment (the way you can do with a mortgage). I had a car loan with Toyota a few years ago that was exactly the same - it's how simple loans work. In the long run, you are saving on interest because you are shortening the length of the loan.
Yes, but their regulations do not stop you from doing a principal only payment if you are up to date on your loan.  You may need to say, principal only and may not like it, but they cannot just apply it to next month's payment because you have paid down some of the debt and should have lower interest.

Spondulix

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Re: Will I get dinged for paying down loans in this way?
« Reply #8 on: December 25, 2014, 11:06:02 PM »
Yes, but their regulations do not stop you from doing a principal only payment if you are up to date on your loan.  You may need to say, principal only and may not like it, but they cannot just apply it to next month's payment because you have paid down some of the debt and should have lower interest.
Yes, and no. Interest accrues daily on a simple interest loan, and regulations do not allow for a true "principal only" payment. You can on a mortgage - you can send a check to the bank that says "principal only" and they will apply it directly to the principal balance. If KidneyMD or I were to send a check to Nelnet that says "principal only," they can't apply it only to principal - regulation says they have to apply it to any accrued interest first (even if payment is up to date). So, the only way to make a true "principal only" payment - one where the balance is 100% applied to principal - is to make two payments in a day. The first payment will cover accrued interest (then go towards principal), and the second will go only towards principal.

However, when you make extra payments on a simple loan, it's not going towards interest that hasn't been earned yet (you're right- that would be illegal). But this IS how it works if you make extra payments on a mortgage without designating it as a "principal only" payment. Showing the due date move forward (which both Nelnet and Toyota did) is a technicality in how it shows in their computer systems... I had this discussion with both. Schedule is somehow associated with balance amounts in their accounting. The amount of interest you accrue on $10k in a day would be exactly the same whether you hit that balance today or 5 years from now - so it doesn't really matter to them when you hit it. I'm sure there's a business benefit to them showing, "you don't owe a payment til April 2019!" because it might encourage the borrower to stop paying for a while because it's not technically due. But, it's not illegal for them to show it to you that way.

Rural

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Re: Will I get dinged for paying down loans in this way?
« Reply #9 on: December 26, 2014, 08:00:12 AM »
Yes, but their regulations do not stop you from doing a principal only payment if you are up to date on your loan.  You may need to say, principal only and may not like it, but they cannot just apply it to next month's payment because you have paid down some of the debt and should have lower interest.
Yes, and no. Interest accrues daily on a simple interest loan, and regulations do not allow for a true "principal only" payment. You can on a mortgage - you can send a check to the bank that says "principal only" and they will apply it directly to the principal balance. If KidneyMD or I were to send a check to Nelnet that says "principal only," they can't apply it only to principal - regulation says they have to apply it to any accrued interest first (even if payment is up to date). So, the only way to make a true "principal only" payment - one where the balance is 100% applied to principal - is to make two payments in a day. The first payment will cover accrued interest (then go towards principal), and the second will go only towards principal.

However, when you make extra payments on a simple loan, it's not going towards interest that hasn't been earned yet (you're right- that would be illegal). But this IS how it works if you make extra payments on a mortgage without designating it as a "principal only" payment. Showing the due date move forward (which both Nelnet and Toyota did) is a technicality in how it shows in their computer systems... I had this discussion with both. Schedule is somehow associated with balance amounts in their accounting. The amount of interest you accrue on $10k in a day would be exactly the same whether you hit that balance today or 5 years from now - so it doesn't really matter to them when you hit it. I'm sure there's a business benefit to them showing, "you don't owe a payment til April 2019!" because it might encourage the borrower to stop paying for a while because it's not technically due. But, it's not illegal for them to show it to you that way.


We actually took advantage of this with our land loan, suspending payments completely for about five months while we made the big push to get the house done enought for our certificate of occupancy. We'd gotten the balance down to about 12K at that point, so the interest hit wasn't too bad. I will suggest that this usually isn't a good idea, and suggest anyone considering it do what I did and go sit down with someone at the bank (or call, if it's not a local bank; I just went to see the bank president) and make sure what you're seeing is something they consider the real due date. It worked in our situation, and then a couple of days after we got that C.O., we paid the whole thing off, a year and a half early. But we weren't absolutely sure we'd have that extra, and the cash flow benefit let us really push on the house.

mlejw6

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Re: Will I get dinged for paying down loans in this way?
« Reply #10 on: January 02, 2015, 12:43:40 PM »
Nelnet customer service is great, so call or drop them an email. One thing I have found is that you can't make principal-only payments, so any extra payments just push back the due date of the next payment.

Just saw this. We have Nelnet loans, also. If you pay an extra payment online, they provide an option to check "Do not advance due date" if you like. I always check it.