All loan companies, especially private student loan companies, are fabulously sneaky. You have to watch their every move, especially when making any additional payments.
Let’s pretend you made an extra monthly payment to one of your student loans. You assume since you’ve already made the regular monthly payment that any additional money will go directly toward the principal of your loan. Wrong! If only it were that easy.
The lender will most likely apply the payment to that account’s interest first. Then, instead of applying the remainder of the payment to the principal, they may split the remainder and apply it to the interest on your other loans. Even though you would have paid the interest on your next payment, this is a major problem.
Interest (non-compounding) does not gain interest, only your original principal balance does. By not applying your additional payments directly to the principal, each extra payment is less effective and each regular monthly payment after that is also less effective. By paying down the principal, you reduce the amount of interest that you accrue over the entire life of the loan. So fighting for those few dollars each month could save you hundreds, if not thousands.
The term loan companies use for their practice is called “Paid Ahead Status.” What this means is that each payment you make pushes back your next due date instead of shortening the life of your loan. While this may be beneficial for some people, it is not helpful to anyone who is working to get out of debt as quickly as possible.
This status can further impact the way your regular monthly payments are applied. For instance, you may find that your regular payments are not being applied in full to any of your “Paid Ahead” loans, and that you are no longer making progress toward paying down those loans. Instead, your payments are being divided out amongst all your loans, creating a less effective payment and accruing as much interest as possible. This is a silent crime.
Here’s what you can do about it.
- Be actively involved in the payments of your loans. Don’t just set them and forget them on automatic bill pay. While convenient, it easily creates a lot of oversight. Check your statements regularly.
- Check to see what was applied to your principal and what was applied to interest. If anything doesn’t seem right call your loan provider ASAP.
- Ask questions, but be polite. Remember that the poor soul on the other end didn’t cause the problem, but they are the one trying to help you. However, if they are being rude or not giving you the answers you’re looking for, ask to speak to a supervisor.
- If you have a problem with a paid ahead status, ask what you need to do to have it removed. Sometimes it’s as easy as checking a box, other times it might require a signed and faxed letter.
Above all, keep being vigilant because chances are somewhere down the line something sneaky will happen again, and awareness is your best defense.