### Author Topic: Calculating return on loan prepayment  (Read 16547 times)

#### ice

• Posts: 7
##### Calculating return on loan prepayment
« on: May 06, 2012, 03:52:51 AM »
Hi Everyone,

My question is about prepaying loans.  What is the proper way to calculate the return on paying down a loan early?

I have a very similar situation to this post:

Student Loan
Principal:  5120
Interest rate:  4.75%
Repayment period: 8 years

To keep the numbers round, let's say there is \$1050 of interest paid if I pay the monthly payment for 8 years.  If I choose to pay off the whole thing right now, what is the proper way to calculate the return?

If I just do 1050/5120 we get 20.5%.
If I take the present value of each interest payment (assuming 3.5% inflation) I get 950.  If I do 950/5120, we get 18.5%.
Or if we look at the interest rate of the loan, we get 4.75%.

I'm not sure which is the correct method for calculating the return you get for the prepayment.  It seems that the conventional wisdom on the net is that paying off a 4.75% loan early gives you a 4.75% return, but I don't see how that is accurate when we look at the total interest saved and the total "investment" (in this case the prepayment amount).  On the other hand, claiming a 20% return seems whack too.

Thanks for any help!

#### gooki

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##### Re: Calculating return on loan prepayment
« Reply #1 on: May 06, 2012, 04:04:16 AM »
Your return on investment by paying off the loan in full is equivalent to the interest rate: 4.75%

I wont get into inflation adjusted ROI's as they're only useful if you are comparing to other options in which case you'd need their inflation adjusted ROI's as well.
« Last Edit: May 06, 2012, 04:06:10 AM by gooki »

#### grantmeaname

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##### Re: Calculating return on loan prepayment
« Reply #2 on: May 06, 2012, 07:34:05 AM »
If it's a public loan, your loan interest is also tax deductible, so the calculation will depend on your marginal tax rate. If you're paying 5% interest but in the 20% bracket, the last percent of the interest is effectively free because it's money you would have paid with taxes. (5 and 20 chosen for their roundness here; try 4.75% interest and your marginal tax rate to see what it corresponds to for you).

#### ice

• Posts: 7
##### Re: Calculating return on loan prepayment
« Reply #3 on: May 06, 2012, 10:54:06 AM »
Thanks for the replies guys.

It's public, but a.) my marginal tax rate is 0 and b.) even when I was paying taxes the interest didn't come close to enough to overcome the standard deduction.

I'm not trying to be thick here, but why is it only 4.75%?  I just don't understand it that well.

If I invest \$5,000 today and instantly get \$1,000, isn't that a return of 20%?

Thanks!

#### grantmeaname

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##### Re: Calculating return on loan prepayment
« Reply #4 on: May 06, 2012, 11:18:53 AM »
If I invest \$5,000 today and instantly get \$1,000, isn't that a return of 20%?
Yes, it would be. But, you don't instantly get \$1000, you save \$1000 over the course of the repayment period. You'll save ~\$200 this year, ~\$175 next year, and so on.

#### James

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##### Re: Calculating return on loan prepayment
« Reply #5 on: May 06, 2012, 11:32:53 AM »
If I invest \$5,000 today and instantly get \$1,000, isn't that a return of 20%?
Yes, it would be. But, you don't instantly get \$1000, you save \$1000 over the course of the repayment period. You'll save ~\$200 this year, ~\$175 next year, and so on.

Exactly.

But one other consideration is the alternate use of the funds.  Paying off that \$5120 means you don't have that \$5120 to invest in other alternatives.  About the lowest rate I would expect at someplace like ING would be .75%, so I would say your rate of return is more like 4%.  But if you were willing to take the risk of the stock market you might think of it as a negative return because you could probably make around 7%, so your return might be called -2.25% if you paid it off?  But that would not be a safe or guaranteed return, so it becomes a personal balance of risk, reward, and comfort level for each individual.

At 4.75% it's not a blatantly obvious call, but I suggest paying it off and considering it a safe 4% return on your investment.

#### grantmeaname

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##### Re: Calculating return on loan prepayment
« Reply #6 on: May 06, 2012, 06:08:49 PM »
MMM talks about the psychological satisfaction of owning a home; I like to think of student loan debt in much the same way. In addition to the safeness of the 4.75% return, it's worth thinking about how much it means to you to pay off your student loan debt. If you don't care a ton either way, perhaps the stock market is a better place for the money. If they weigh heavily on your psyche, that may be worth more to you than a chance to do a couple percent better in the stock market.

It's sort of another variable that you should consider when you're making your choice.

#### arebelspy

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##### Re: Calculating return on loan prepayment
« Reply #7 on: May 06, 2012, 07:32:33 PM »
MMM talks about the psychological satisfaction of owning a home; I like to think of student loan debt in much the same way. In addition to the safeness of the 4.75% return, it's worth thinking about how much it means to you to pay off your student loan debt. If you don't care a ton either way, perhaps the stock market is a better place for the money. If they weigh heavily on your psyche, that may be worth more to you than a chance to do a couple percent better in the stock market.

It's sort of another variable that you should consider when you're making your choice.

Absolutely true.  I have the opposite problem: paying off low interest debt makes me feel guilty.  Paying down debt instead of using that money to make more money weighs on me.  I feel freer with the debt, knowing I'm reaching FI sooner.

For most people, it's the opposite.  I encourage many of my friends to pay down debt.  I encourage others (more Mustachian) to not.  It really does come down to risk tolerance and the individual.

Either way, it's a good thing.
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#### ice

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##### Re: Calculating return on loan prepayment
« Reply #8 on: May 07, 2012, 01:15:50 AM »
Ahhhah...so the error in my thinking was the idea that the \$1,000 is instant.  Cool.  Thank you.  That makes more sense.

I have thought a lot about the opportunity cost of paying it down, but I'm excited to pay off the debt.  Plus, it gets even better:  I have another loan at 6.8%, so when averaged together I'm getting about a 5.7% return rather than just 4.75%.

#### Freedom2016

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##### Re: Calculating return on loan prepayment
« Reply #9 on: May 01, 2014, 11:57:28 PM »
I'm reviving this thread because I've got a similar question/consideration about paying off my last student loan.

It has a remaining balance of about \$34,000, @ 3.125% interest, 10 years remaining. We will have the cash in hand next month to pay it off if we choose. Of course, we could also put the same sum in a taxable account, and keep making the monthly \$235 payment.

Am I calculating the opportunity cost of paying off the SL correctly?

Option 1: Pay off \$34,000 SL. Save \$4410 in additional interest over the next 10 years.
Option 2: Invest \$34,000 in taxable stock index fund. Assuming 7% return, earn \$32,883 over 10 years. Assuming 6% return, earn \$26,889 over 10 years.

Am I missing anything in the above calculations? If not, it seems that we would give up \$22,479-\$28,473 in gains in if we paid off the SL!

#### MDM

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##### Re: Calculating return on loan prepayment
« Reply #10 on: May 02, 2014, 01:12:32 AM »
You have it about right, given the assumptions you use, but it's a little less favorable than that.

First, it might be worth checking the numbers on your loan: \$34K financed at 3.125% over 10 years requires a \$330/mo payment and will cost \$5633 in interest.  If you are paying only \$235/mo now, something is not as stated.

Back to the options.  Another simplified way to view them:
1) Take that \$34K and pay the loan.  Done, and you have \$0 left over.  Nothing more to calculate.
2) Invest the \$34K, then withdraw \$330 each month to make the loan payment.
- At 7% constant investment return, after 10 years you will have ~\$11,200 left over and the loan will be paid.
- At 6% "                                                                " you will have ~\$7,700   "                                                  ".

But that analysis ignores taxes, so you would need to know your marginal tax rate, and whether you would be able to deduct student loan interest, in order to determine the final amount.

Another major item in the calculations is the "Assuming [a constant] X% return".  If that assumption holds true, the math is the math and the answers follow.  If, however, your investment loses money over that 10 years (certainly possible, even if not probable) then "pay the loan immediately" will have been preferable.

In the end you need hindsight glasses to know the best action.  Lacking those, you need to understand the likelihood of various investment returns, and your risk tolerance in case "actual" is worse than "likely".  Sorry it's not completely straightforward.

#### Freedom2016

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##### Re: Calculating return on loan prepayment
« Reply #11 on: May 02, 2014, 08:55:19 AM »
Thanks! I figured something wasn't quite right.

I've actually already been paying on the loan for 10 years (initial balance over \$44k), so it's partially amortized - I think that accounts for the monthly payment difference you noticed.

We are in the 33% marginal bracket - I assume this erodes the gains from investing even further (how to calculate?).

#### Heart of Tin

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##### Re: Calculating return on loan prepayment
« Reply #12 on: May 04, 2014, 03:02:00 PM »
Thanks! I figured something wasn't quite right.

I've actually already been paying on the loan for 10 years (initial balance over \$44k), so it's partially amortized - I think that accounts for the monthly payment difference you noticed.

We are in the 33% marginal bracket - I assume this erodes the gains from investing even further (how to calculate?).

Regardless of how long you've been paying the loan 120 payments of \$235 is only \$28,000 which isn't even sufficient to cover the principal let alone the interest on the loan described above. Ammortization will not make the payments you need going forward smaller.

#### Freedom2016

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##### Re: Calculating return on loan prepayment
« Reply #13 on: May 04, 2014, 04:35:55 PM »
Yes, there's something funky about my loan b/c the numbers don't add up unless I've got 15+ years left on the loan, and that doesn't make sense. The loan servicing website says:

Original balance: \$44,103
Remaining balance: \$34,005
Interest rate: 3.125% fixed
Monthly payment: \$235.90

#### arebelspy

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##### Re: Calculating return on loan prepayment
« Reply #14 on: May 04, 2014, 05:48:23 PM »
You need to get the details on your loan, you may have some sort of balloon payment or something (could be a 15 year loan amortized over a longer time period or something, with a lump sum due at some point).  In any case, find out what's going on with that.  :)
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#### MDM

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##### Re: Calculating return on loan prepayment
« Reply #15 on: May 04, 2014, 06:04:36 PM »
Yes, there's something funky about my loan b/c the numbers don't add up unless I've got 15+ years left on the loan, and that doesn't make sense. The loan servicing website says:

Original balance: \$44,103
Remaining balance: \$34,005
Interest rate: 3.125% fixed
Monthly payment: \$235.90
Based on your "unless I've got 15+ years left", you have the mortgage payment math in hand.  Various possibilities come to mind, including that at some point during the loan
- Interest rate changed
- Payments suspended
- Loan length changed
- ...?

If nothing rings a bell, the loan service should be able to give you a complete history of terms, conditions, payments, etc.

#### Freedom2016

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##### Re: Calculating return on loan prepayment
« Reply #16 on: May 04, 2014, 06:08:23 PM »
Yes, the loan has switched hands 3 times since I took it out and I don't have the original paperwork handy anymore, nor the memory to recall if there were special conditions along the way. Hopefully the mystery will resolve soon once I hear back from them...

#### Freedom2016

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##### Re: Calculating return on loan prepayment
« Reply #17 on: May 08, 2014, 09:41:10 AM »
Update

I finally heard back from my loan servicer:

Thank you for your inquiry to the Borrower Services Department.

Please allow me to respond to your request for an amortization schedule. Unfortunately, we cannot honor this request. As indicated on your promissory note(s), interest accrues daily based on the current principal balance. As payments may be received at varying times during the month, an accurate amortization schedule cannot be produced.

Kindly note that the loan is scheduled to be paid in full on or before 12/14/2029. There is approximately
181 payments remaining.

Sincerely,

Borrower Services E Mail Support

I had been googling the company in the last few days and it turns out that this loan servicing company has LOTS of complaints from borrowers - interest calculated in sketchy ways, being obstructive about applying extra payments toward principal, being unresponsive to borrower requests for information (*cough cough see above*).

I don't have any idea why I still have 15 years left on this loan when I know I've been paying it down for almost 10 years and I should have had much more principal reduction by now than they are showing. So I'm tempted to pay off the loan now, and forego the opportunity cost, just to not have to deal with anything sketchy from them in the coming years.

#### arebelspy

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##### Re: Calculating return on loan prepayment
« Reply #18 on: May 08, 2014, 10:23:04 AM »
You need to get it figured out, not just pay it off.  You may or may not want to pay it off after you get it figured out, but taking the easy way out "I'll pay it off instead of figuring it out" method may cost you lots of money.

If they have been doing it wrong, and your balance should be less than it is, then you may save yourself serious money fighting through the red tape and figuring it out.

Read this journal for an example:
http://forum.mrmoneymustache.com/journals/be-a-lamp-unto-yourself-my-journal-and-thank-you/msg75139/#msg75139
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
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#### MDM

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##### Re: Calculating return on loan prepayment
« Reply #19 on: May 08, 2014, 11:22:54 AM »
+1

What records do you have that support "paying it down for almost 10 years"?

If you know the original balance, how much you paid and when you paid it, what you now owe can be determined.  A spreadsheet would help but isn't strictly necessary - loans have been around longer than computers.

You will also need to know the interest rate, payment terms (e.g., is a payment within the grace period credited as being made on the due date or on the date received?), and any penalties for paying late if applicable.  You mentioned "I don't have the original paperwork handy anymore" - probably worth finding it if it's only not handy.

If you can get more specifics there are folks here who are good at helping with calculations if needed.

If you don't have specifics, I'd suggest calling (vs. e-mailing) the loan service.  You might get someone helpful - can't do any worse than the current situation, correct?  You can tell them "your recent e-mail does not match my understanding" (or words to that effect) and ask them to provide their records of your past payments, etc.

The statement "As payments may be received at varying times during the month, an accurate amortization schedule cannot be produced" is ridiculous.  It may be qualified by "assuming payments are received on the first of each month" or similar, but an accurate schedule absolutely can be produced - otherwise how would anyone decide who owes what?

I don't blame you for wanting to sever ties with this company, but as arebelspy noted a little more digging on your part might be worthwhile.  Plus you'd get the non-monetary benefit of knowing that they didn't take advantage of you.

Worst case: you find that they are 100% correct, ethical, etc. and that you just need to keep better records.  So then you do so, starting now.

#### Freedom2016

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##### Re: Calculating return on loan prepayment
« Reply #20 on: May 08, 2014, 05:28:35 PM »
I've gleaned more info from my credit reports which is helping put the puzzle together.

The loan was originally owned by JP Morgan Chase with a starting balance of \$44,103 which is consistent with what this servicer says.

I started payments to Chase in 12/2004. I made consistent monthly payments (never late) through 3/2010, at which point the loan was sold to the current servicer. My payment amount to Chase was \$244 and at least one of my credit reports indicates that it was a 20 year loan when Chase held it. Assuming a constant 3.125% interest rate, amortization tables indicate that by the time the loan was sold to the current servicer, the principal should have been paid down to close to \$34,888.

But according to the current service provider, based on the current principal amt left, and the amount of principal I've paid down with them since 4/10, it appears that when they bought the loan I still had \$40,791 in principal. Further, they seem to have changed the terms of the loan to be a 25-year loan -- not 20 year.

Outstanding questions to verify:
• What was the actual principal pay-down during the time Chase held the loan?
• How/why/when did the loan term change? (I have NO recollection of having asked for, received paperwork on, or approved such a change)

Quote
The statement "As payments may be received at varying times during the month, an accurate amortization schedule cannot be produced" is ridiculous.  It may be qualified by "assuming payments are received on the first of each month" or similar, but an accurate schedule absolutely can be produced - otherwise how would anyone decide who owes what?

I agree with this - patently stupid. My payment is drafted electronically on the 14th of every month; it is entirely predictable.
« Last Edit: May 08, 2014, 05:31:12 PM by course11 »

#### MDM

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##### Re: Calculating return on loan prepayment
« Reply #21 on: May 08, 2014, 06:48:28 PM »
Good digging.

Was your payment to Chase exactly \$244.00/mo?  You should be able to reproduce - to the penny - your monthly payment, given principal, interest, and loan length.  E.g., you can use the PMT function in Excel: a loan amount of \$44,000.00 at 3.00% for 20 years gives a payment of \$244.02.

Certainly appears you have a good case to get the current service to recalculate things.

#### Freedom2016

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##### Re: Calculating return on loan prepayment
« Reply #22 on: May 08, 2014, 10:57:27 PM »
I'm not sure what my exact pymt to Chase was: credit reports round to the dollar, and I doubt I have bank records from before 2010 anymore. My very first payment to my current servicer was \$244.29, but the very next month the payment changed to \$235.90 which it's been ever since.

The closest I can get an amortization table to match the \$244 Chase payment is \$244.59, @ 3% interest, 20 year loan, starting balance \$44,102.87. Under that scenario, the remaining principle at the time of the handover to this servicer would have been \$34,791.94. But I don't think the 3% interest rate is right, unless Chase offered me a few points off for paying electronically?

This servicer does list every payment I've made to them since 4/10, and how much went to principal/interest each month. Does it strike anyone as suspicious that the interest amounts I have paid each month do not reduce consistently over time, as I would expect? I tried to attach a snippet of my payments - not sure if it worked.

Update: my loan accrues interest on a daily basis, and google tells me that such "simple interest" loans do not follow amortization schedules that typically assume that interest accrues on a monthly basis. See, e.g. http://www.inman.com/2006/10/09/simple-interest-mortgage-why-tracking-payoff-so-tricky/#.U2xv3y830rc. This probably explains the wacky interest amounts on the attached.

« Last Edit: May 09, 2014, 12:05:54 AM by course11 »

#### MDM

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##### Re: Calculating return on loan prepayment
« Reply #23 on: May 09, 2014, 12:20:11 AM »
Ok, it appears student loan repayment is different from mortgage loan repayment (i.e., different from what Excel PMT assumes).
See https://studentaid.ed.gov/types/loans/interest-rates:
"The amount of interest that accrues (accumulates) on your loan from month to month is determined by a simple daily interest formula. This formula consists of multiplying your loan balance by the number of days since the last payment times the interest rate factor.
Simple daily interest formula:
Outstanding principal balance
x number of days since last payment
x interest rate factor
= interest amount"

Note the loan service e-mail quote (emphasis added): "As indicated on your promissory note(s), interest accrues daily based on the current principal balance."

The reason the interest payments do not monotonically decrease is because you are being charged interest daily, not monthly.  Payments in March show the lowest interest amounts, because February has the least number of days: the time between your Feb and March payments is the shortest of the year.

One should be able to reproduce the payment history in Excel, based on http://www.myfedloan.org/billing-payment/about-interest/index.shtml:
"When you make a payment, our computer system counts the number of days since we processed your last payment.
Then we apply your payment as follows:
Accrued interest—The amount of interest that accrued every day between the date of the last payment and the new payment must be satisfied first.
Current principal balance—The remainder then applies toward your current principal balance."

And so we can: if you copy and paste the following table into Excel, with "Annual interest rate" going in cell A2, it reproduces your payment history "almost" exactly (you'll need to reformat some, e.g. column A as "dates", etc.).  The "almost" is likely because the loan service rounds calculations in a slightly different manner.

This doesn't explain how \$34,888 became \$40,791 but at least it gives you something....

 Annual interest rate 0.03125 Daily interest rate =B2/365 - - - - - - Date Days since last pmt Interest Payment Principal Loan amount 40557 39439.36 =EDATE(A6,1) =A7-A6 =ROUND(B7*\$B\$3*F6,2) 235.9 =D7-C7 =F6-E7 =EDATE(A7,1) =A8-A7 =ROUND(B8*\$B\$3*F7,2) =D7 =D8-C8 =F7-E8 =EDATE(A8,1) =A9-A8 =ROUND(B9*\$B\$3*F8,2) =D8 =D9-C9 =F8-E9 =EDATE(A9,1) =A10-A9 =ROUND(B10*\$B\$3*F9,2) =D9 =D10-C10 =F9-E10 =EDATE(A10,1) =A11-A10 =ROUND(B11*\$B\$3*F10,2) =D10 =D11-C11 =F10-E11 =EDATE(A11,1) =A12-A11 =ROUND(B12*\$B\$3*F11,2) =D11 =D12-C12 =F11-E12 =EDATE(A12,1) =A13-A12 =ROUND(B13*\$B\$3*F12,2) =D12 =D13-C13 =F12-E13 =EDATE(A13,1) =A14-A13 =ROUND(B14*\$B\$3*F13,2) =D13 =D14-C14 =F13-E14 =EDATE(A14,1) =A15-A14 =ROUND(B15*\$B\$3*F14,2) =D14 =D15-C15 =F14-E15 =EDATE(A15,1) =A16-A15 =ROUND(B16*\$B\$3*F15,2) =D15 =D16-C16 =F15-E16 =EDATE(A16,1) =A17-A16 =ROUND(B17*\$B\$3*F16,2) =D16 =D17-C17 =F16-E17 =EDATE(A17,1) =A18-A17 =ROUND(B18*\$B\$3*F17,2) =D17 =D18-C18 =F17-E18 =EDATE(A18,1) =A19-A18 =ROUND(B19*\$B\$3*F18,2) =D18 =D19-C19 =F18-E19 =EDATE(A19,1) =A20-A19 =ROUND(B20*\$B\$3*F19,2) =D19 =D20-C20 =F19-E20 =EDATE(A20,1) =A21-A20 =ROUND(B21*\$B\$3*F20,2) =D20 =D21-C21 =F20-E21 =EDATE(A21,1) =A22-A21 =ROUND(B22*\$B\$3*F21,2) =D21 =D22-C22 =F21-E22 =EDATE(A22,1) =A23-A22 =ROUND(B23*\$B\$3*F22,2) =D22 =D23-C23 =F22-E23 =EDATE(A23,1) =A24-A23 =ROUND(B24*\$B\$3*F23,2) =D23 =D24-C24 =F23-E24 =EDATE(A24,1) =A25-A24 =ROUND(B25*\$B\$3*F24,2) =D24 =D25-C25 =F24-E25 =EDATE(A25,1) =A26-A25 =ROUND(B26*\$B\$3*F25,2) =D25 =D26-C26 =F25-E26 =EDATE(A26,1) =A27-A26 =ROUND(B27*\$B\$3*F26,2) =D26 =D27-C27 =F26-E27 =EDATE(A27,1) =A28-A27 =ROUND(B28*\$B\$3*F27,2) =D27 =D28-C28 =F27-E28 =EDATE(A28,1) =A29-A28 =ROUND(B29*\$B\$3*F28,2) =D28 =D29-C29 =F28-E29 =EDATE(A29,1) =A30-A29 =ROUND(B30*\$B\$3*F29,2) =D29 =D30-C30 =F29-E30 =EDATE(A30,1) =A31-A30 =ROUND(B31*\$B\$3*F30,2) =D30 =D31-C31 =F30-E31 =EDATE(A31,1) =A32-A31 =ROUND(B32*\$B\$3*F31,2) =D31 =D32-C32 =F31-E32 =EDATE(A32,1) =A33-A32 =ROUND(B33*\$B\$3*F32,2) =D32 =D33-C33 =F32-E33 =EDATE(A33,1) =A34-A33 =ROUND(B34*\$B\$3*F33,2) =D33 =D34-C34 =F33-E34 =EDATE(A34,1) =A35-A34 =ROUND(B35*\$B\$3*F34,2) =D34 =D35-C35 =F34-E35 =EDATE(A35,1) =A36-A35 =ROUND(B36*\$B\$3*F35,2) =D35 =D36-C36 =F35-E36 =EDATE(A36,1) =A37-A36 =ROUND(B37*\$B\$3*F36,2) =D36 =D37-C37 =F36-E37 =EDATE(A37,1) =A38-A37 =ROUND(B38*\$B\$3*F37,2) =D37 =D38-C38 =F37-E38 =EDATE(A38,1) =A39-A38 =ROUND(B39*\$B\$3*F38,2) =D38 =D39-C39 =F38-E39 =EDATE(A39,1) =A40-A39 =ROUND(B40*\$B\$3*F39,2) =D39 =D40-C40 =F39-E40 =EDATE(A40,1) =A41-A40 =ROUND(B41*\$B\$3*F40,2) =D40 =D41-C41 =F40-E41 =EDATE(A41,1) =A42-A41 =ROUND(B42*\$B\$3*F41,2) =D41 =D42-C42 =F41-E42 =EDATE(A42,1) =A43-A42 =ROUND(B43*\$B\$3*F42,2) =D42 =D43-C43 =F42-E43 =EDATE(A43,1) =A44-A43 =ROUND(B44*\$B\$3*F43,2) =D43 =D44-C44 =F43-E44 =EDATE(A44,1) =A45-A44 =ROUND(B45*\$B\$3*F44,2) =D44 =D45-C45 =F44-E45

#### Freedom2016

• Pencil Stache
• Posts: 732
##### Re: Calculating return on loan prepayment
« Reply #24 on: May 13, 2014, 01:23:13 PM »
As an update:

I found the paperwork from when my loan was sold to the current servicer. My prior interest rate had been 3.375%. I must have gotten a 0.25% reduction for going to automatic payments with the current company.

I seem not to have the original promissory note anymore, and I can't make sense of why my principal reduction at the time of the transfer of my loan was so low. Seems like I should have paid off almost \$5000 more than the paperwork indicates, even accounting for daily interest accrual (thanks for the formula, MDM!). If/when I have more time, I'll consider calling the servicer to try to extract the historical records on my payments prior to 3/10.

I am left with the following reality: I have 15 years left on this 3.125% loan, and it's back to the original question of whether to pay it off or invest the funds in the market. I am becoming keenly aware that there's a "financially optimal" answer, and an "emotional/psychological" answer. You'll see I have another current post (http://forum.mrmoneymustache.com/investor-alley/another-%27what-to-do-with-extra-cash%27-post/) asking about what to do with other extra cash we will have this year, so the decision on this loan is taking place within that broader context.

Thanks for all the input you've provided!

#### Dollarbill49

• Posts: 42
##### Re: Calculating return on loan prepayment
« Reply #25 on: May 13, 2014, 02:04:55 PM »
You say you will have the cash in hand next month and that you're in the 33% marginal brakcet.  That means you had taxable income of between 183k - 398k (filing single) and 223k-398k (married filing jointly).  Unless you are lavishly spending money, forget all the analysis, take the money in June and pay the loan off.

Two lessons you should learn:  1.  Don't throw out (misplace) important contractual documents.  You always eventually need them

2.  Make sure you thoroughly understand how things work financially.  If you don't, you shouldn't enter into the contract.

I know, you were a college student when this all happened but please don't make that mistake going forward.

Good luck and put your mind at easy.  Pay it off since you'll have the cash.

#### Freedom2016

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• Posts: 732
##### Re: Calculating return on loan prepayment
« Reply #26 on: May 13, 2014, 02:40:46 PM »
Yes, lessons (well) learned. :)

I am leaning toward pay off which is an interesting shift b/c I started off in the "let's optimize finances" camp. DH says he could go either way.

I think a lot about minimizing our monthly cash flow needs b/c my business does have fluctuating income, and the fewer monthly obligations we have, the less stress we have during those lower-business-income months.

#### Freedom2016

• Pencil Stache
• Posts: 732
##### Re: Calculating return on loan prepayment
« Reply #27 on: May 15, 2014, 05:30:57 PM »
Final update for this thread: The non-monetary reasons won out. I paid off my SL in full by phone today.  It's a nice feeling to be totally done with them. In total, I've paid off \$92,000 in loans between undergrad and grad school. Onward and upward!

#### arebelspy

• Senior Mustachian
• Posts: 28265
• Age: -999
• Location: Seattle, WA
##### Re: Calculating return on loan prepayment
« Reply #28 on: May 15, 2014, 06:25:09 PM »
So you just gave up on the \$5000?
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

#### Bearded Man

• Handlebar Stache
• Posts: 1142
##### Re: Calculating return on loan prepayment
« Reply #29 on: May 15, 2014, 06:58:44 PM »
According to this article it is the rate of the mortgage interest.

http://www.mtgprofessor.com/A%20-%20Early%20Payoff/When_Is_early_payoff_a_good_investment.htm

#### Freedom2016

• Pencil Stache
• Posts: 732
##### Re: Calculating return on loan prepayment
« Reply #30 on: May 15, 2014, 07:06:24 PM »
So you just gave up on the \$5000?

No. I requested the historical records on my loan. If we learn there has been an overpayment I will still be able to get a refund even if the loan is paid in full.

#### Freedom2016

• Pencil Stache
• Posts: 732
##### Re: Calculating return on loan prepayment
« Reply #31 on: June 20, 2014, 04:43:33 PM »
As the final "coda" on this thread: I received the full payment records on this student loan, going all the way back to 2004.

I clearly have amnesia, because I had forgotten that for the first 4 years of the loan, I made minimum payments that were about half of what my payments since then have been. That is why the principal reduction was so small at the time the current servicer purchased the loan.

Bottom line: there was no fraud involved on the part of the servicer. The records they sent me indicated they actually owe me \$29 because the payoff amount I sent was too high.

#### MDM

• Senior Mustachian
• Posts: 10369
##### Re: Calculating return on loan prepayment
« Reply #32 on: June 20, 2014, 05:58:12 PM »
course11, thanks for the update - always good to hear "the rest of the story."

Btw, is that Urban Studies & Planning?  If the question doesn't make sense then the answer is "no".

#### Freedom2016

• Pencil Stache
• Posts: 732
##### Re: Calculating return on loan prepayment
« Reply #33 on: June 20, 2014, 06:06:02 PM »
Yep. I was also Course 4 but 11 was my terminating degree. :)