Can student loan minimum payments go up upon full repayment of another?

Question

I am in the U.S. and currently paying off student loans.

Here is a hypothetical situation that shows what I am asking about:

• I have 5 loans (all from one financial institution) of $1,000 a piece, making for $5,000 total.
• The minimum payment for all 5 of them put together is $125, being $25 for each loan.
• I decide I am going to pay the minimum payment, plus $200 each month, until loan #4 is paid off (it has a higher interest rate than the others).
• As soon as I pay off loan #4, I want to continue paying $325 total, but now have $100 go to the minimum payment, and $225 go toward loan #1 (which is the highest interest rate, now that #4 is paid off).
• Instead what has happened loan #2 (lowest interest rate of the four remaining loans) jumps to $50 minimum payment, and now my $325 payment each month only has the same $200 going to the loan of my choice, which is #1.

How is this possible? Is there anything I can do to get loan #2's minimum payment back to where it was?

Answer 1

Unfortunately, your hypothetical numbers don't work in reality. For any of those $1000 loans to have an individual minimum payment of $25 over a 120-month term, you'd have to be paying an illegal amount of interest for a student loan, (way more than 9%), meaning you're either severely delinquent, in default, or you took out a personal loan not guaranteed by the government (with a horrendous interest rate).

So, it would help if you gave us numbers closer to reality, and told us exactly what type of loans they were.

I can tell you that federally-backed loans have a minimum payment, based on the loan type. If the minimum payment for the loan amount based on a 120-month period is less than that floor, the floor is automatically applied, and the payback period is adjusted accordingly. So, let's say that you took out a $5500 Stafford loan split half-and-half between sub and unsub ($2750 each). Your servicer may consider the two parts of the loan to be two loans, since the amounts have different interest rates. However, the fed.gov considers these two to be the same Stafford loan and enforces a $50 minimum payment on that loan. Now, the minimum payment on a $5500 Stafford loan, split half-and-half with a sub rate of 3.4% and an unsub rate double that, is actually about $58, above the minimum.

Let's then suppose that you told the servicer to "snowball" the higher-interest loan amount, applying an extra $200 over the minimum payment to the unsubsidized portion until it was paid off. Now you have an outstanding balance on the subsidized half, but have paid off the unsubsidized half. The normal minimum payment on the subsidized amount would be something like $24, but that's now less than the federally-enforced "floor" of $50 for the full loan, so the floor amount is applied and the payback term of that loan is reduced.

If this is what has happened in your case, it is impossible to get this change reversed; it's mandated by Federal law. But, the payback term of that loan will be cut in half (and with a smaller final payment to boot), so Loan 2 will be paid off faster, and then that loan and its minimum payment comes off the books entirely, freeing you to apply the amount somewhere else. In the meantime, you'll just have to be content with applying only $200 to the next highest-rate loan and not $225.