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I have numerous private student loans, with amounts and interest rates like this:

$30,000    7%
 25,000    7%
 10,000    7%
  5,000    6%
  4,000    5%

My loan provider told me I have two options. In either case, I have to make the minimum monthly payment on every loan, which is split between interest and principal. My two options are:

  1. I can make an additional payment above and beyond the minimum payment. I cannot tell them that this payment should be applied to principal only, and I cannot apply it to a specific loan, e.g. the ones with the highest interest rates. No matter what I tell them, they take any additional money I send them and split it evenly between the interest and principal on EVERY loan.

  2. I can make the minimum payment only, and save the money in an external account until I have enough to pay off a single loan as a lump sum. Then, AND ONLY THEN, will they apply the additional money I send them to a loan of my choice (ONLY IF I CAN PAY IT OFF).

There are no separate fees for each loan, so should I basically treat this as one big loan with some average interest rate, and make as large a payment as I can every month?

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    You might double-check with the provider about the restrictions. Sallie Mae will ungroup a consolidated loan payment which would allow you to focus on the higher interest loans first (at the cost of making separate payments).
    – mkennedy
    Dec 18, 2014 at 19:13
  • @mkennedy Oh, I have checked with them many, many times, and they're unwilling to break my consolidated payment apart.
    – Michael A
    Dec 18, 2014 at 19:32
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    How often do you get paid? If two weeks, can you pay them every two weeks instead every month? I paid off my car loan early by three months (5 year loan) this way.
    – Sun
    Dec 18, 2014 at 20:37
  • @sunk818 I get paid twice a month, so I could look into paying from each paycheck instead of paying once a month.
    – Michael A
    Dec 18, 2014 at 21:54
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    well, you could not pay them, and in 7 years once it falls off your credit report, it's like nothing ever happened.....
    – MDMoore313
    Dec 19, 2014 at 0:43

7 Answers 7

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It's definitely NOT a good idea to pay off one of the smaller loans in your case - a $4k payment split across all the loans would be better than repaying the 5% / $4k loan completely, as it's the most beneficial of your loans and thus is last priority for repayment.

A payment that splits across all the loans equally is, in effect, a partial repayment on a loan with an interest rate of 6.82% (weighed average rate of all your loans). It's not as good as repaying a 7% loan, but almost as good.

It might be an option to save up until you can repay one of your 7% loans, but it depends - if it takes a lot of time, then you would've paid unneccessary interest during that time.

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  • I only have 3-4 months left in which I don't need to make any payment, and there's absolutely no way I can save up to pay off one of the big loans as lump sum in that time. I can't save 10,000 in four months, unfortunately. If I read what you're saying correctly, you're saying that due to the restrictions on how I can pay these loans, it makes sense to just keep paying as much monthly payment as I can, even if it's split between every loan?
    – Michael A
    Dec 18, 2014 at 15:30
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    Yes, also considering that you're not going to get the 6.82% average rate (or even that 5% rate) on your saving account. As so often, the balance is that savings can be applied easier in case of emergencies, whereas loan repayments cannot be reversed that easily. (would require a new loan, which may be hard to obtain).
    – MSalters
    Dec 19, 2014 at 1:21
  • @MSalters Yep, I think my best bet is to keep making monthly payments, even if they're split between every loan. That way I'm still paying down a pretty high interest rate loan, even if it's not the best I could do in an ideal world.
    – Michael A
    Dec 20, 2014 at 0:18
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You might try to refinance some of those loans. It sounds like you are serious about minimizing interest expense, if you think you will be able to pay those loans in full within five years you might also try a loan that is fixed for five years before becoming variable.

If you do not think you can repay the loans in full before that time, you should probably stick with the fixed rates that you have.

It may even be profitable to refinance those loans through another lender at the exact same fixed rate because it gets around their repayment tricks that effectively increase your interest on those two smaller loans.

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  • The examples in that link are somewhat shady. The first example starts with $130.000 income, 755 credit score, and repaying in 6 or 7 years - how much?
    – MSalters
    Dec 19, 2014 at 1:25
  • What's shady about a high income and credit score? The point of the link was that there are additional options for refinancing student debt for people who have the ability to pay them down quickly. If you don't have the income to pay your loans in 5 years, it wouldn't make sense to use a loan that would become variable after 5 years, would it?
    – NL - Apologize to Monica
    Dec 19, 2014 at 3:41
  • The shady bit is that it's left unspecified whether the 6-7 year repayment example applies to a $10K loan or a $250K loan.
    – MSalters
    Dec 19, 2014 at 10:48
  • I think you need to reread the blog, the entire example was considering an example of $40k loaned, one at a fixed rate of 4.74% and the other with 5-year fixed at 4.14% then variable for another five years. I linked the blog to show that there are creative ways of getting lower interest rates for someone who is determined to pay off their loans quickly and completely.
    – NL - Apologize to Monica
    Dec 19, 2014 at 16:18
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It doesn't make a whole lot of sense to save up and wait to make a payment on any of these loans. Any dollar you pay today works better than saving it and waiting months to pay it, no matter which loan it will be applied to.

Since your lender won't let you choose which loan your payment is being applied to, don't worry about it. Just make as big a payment as you can each month, and try to get the whole thing out of your life as soon as possible.

The result of this will be that the smaller balance loans will be paid off first, and the bigger balance loans later. It is unfortunate that the higher interest rate loans will be paid later, but it sounds like you don't have a choice, so it is not worth worrying about.

Instead of thinking of it as 5 loans of different amounts, think of it as one loan with a balance of $74,000, and make payments as quickly and as often as possible.

For example, let's say that you have $1000 a month extra to throw at the loans. You would be better off paying $1000 each month than waiting until you have $4000 in the bank and paying it all at once toward one loan. How the lender divides up your payment is less significant than when the lender gets the payment.

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  • +1 He says he can't save up $10k in 4 months, so paying the loan as you have the money is better.
    – Sun
    Dec 18, 2014 at 20:35
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The one thing that I saw in here that raised a big red flag is that you said you "overpaid" on your interest. ALWAYS make sure you tell them that any extra money should be applied to principal only, not to interest. You accrue interest based on your outstanding principal amount, so getting that lower reduces the overall amount of interest you end up paying. Paying the interest ahead saves you nothing.

However, make sure you pay the current interest owed that month. They can capitalize past due interest - in affect, change that to be considered an addition to the loan principal amount and you end up paying interest on the interest.

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  • I have told them that any extra money should be applied to the principal; they said that they don't do that. Any extra money that I send them above the minimum payment is split evenly between the interest and principal on EVERY loan. I don't have a choice in that matter.
    – Michael A
    Dec 18, 2014 at 19:26
  • @MichaelA the nerve of them to tell you such baloney. this makes me so cross! i would tell them to take a flying fig!
    – user12515
    Dec 19, 2014 at 15:24
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    @MichaelA I don't even see how they can tell you "they don't do that". If you pay extra money every month and pay off the loan early without them applying the extra to principal, they are effectively collecting interest that they didn't earn. How is this not robbery?
    – user12515
    Dec 19, 2014 at 15:25
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    Wow! Is it actually legal in The United States to collect extra interest - I thought that any extra payment would of course go towards the principal. Which of the Grand Financial Institutions in your country works this way?
    – PkP
    Dec 19, 2014 at 18:46
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    @MichaelA I used to works at FedLoan Servicing (PHEAA) which does the servicing on a quarter of all federally subsidized loans and confirmed with past co-worker that, by law, any Pell or other federally subsidized student loans must allow you to pay toward principal. Since you say these are private loans, you are pretty much screwed and tied to the terms you signed for. The biggest disgrace in the college world is how colleges have been pushing students into these usurious private loans - and in some cases getting a 'commission'.
    – Jim Johnson
    Dec 20, 2014 at 0:41
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Excellent question and it is a debate that is often raised. Mathematically you are probably best off using option #1. Any money that is above and beyond minimum payments earns a pretty high interest rate, about 6.82% in the form of saved interest payments.

The problem is you are likely to get discouraged. Personal finance is a lot about behavior, and after working at this for a year, and still having 5 loans, albeit a lower balance, might take a bit of fight out of you.

Paying off such a large balance, in a reasonable time, will take a lot of fight.

With the debt snowball, you pay the minimum to the student loan, save in an outside account, and when it is large enough, you execute option #2. So a year from now you might only have three loans instead of five. If you behaved exactly the same your balance would be higher after that year then using the previous method.

However often one does not behave the same. Because the goals are shorter and more attainable it is easier to delay some gratification. The 8 dollars you are saving in your weekly gas budget, because of low prices, is meaningful when saving for a 4K goal, where it is meaningless when looking at it as a 74K goal. With the 4K goal you are more apt to put that money in your savings, where the 74K goal you might spend it on a latte.

For me, the debt snowball worked really well.

With either option make sure that excess payments actually go to a reduction in principle not a prepayment of interest. Given this you may be left with no option. For example if method #1 you only prepay interest, you are forced to use option #2.

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  • OP is not writing 5 checks to 5 servicers, so the snowball doesn't seem like it really provides a psychological advantage here.
    – NL - Apologize to Monica
    Dec 18, 2014 at 18:37
  • I disagree, my wife had a similar structure: 5 or 6 loans and one payment. We did it exactly as the debt snowball and were encouraged.
    – Pete B.
    Dec 18, 2014 at 18:41
  • Wait, option 2 makes more sense? In that I should only pay the minimums, and save the money in an external account in order to pay off the lump sum? The interest I'd earn in a savings account is FAR less than the saved interest I'd earn if I paid that money towards all of the loans (even taking into account the fact that the payment is split across all of them).
    – Michael A
    Dec 18, 2014 at 19:20
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Are there any (monthly) administrative fees on those loans that are charged separately? If not, you should just pay as much as you can as quick as you can to get the loan amount down on those loans with the highest interest rate. If there are no separate fees on the loans, then it's just a lump of money with some interest rate. The smaller loans will eventually drop away one by one, have a celebration to remark the occasion when that happens. I assume the payment is split evenly between the loans?

Restructure if you get a better deal from someplace.

Delay buying new stuff until you get the loan amount down. Pay as much as you can as quickly as you can, but keep enough money in your pocket to survive a month or two, so that you don't need to get any more loans in case something unexpected happens.

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  • Yes, the payment is split between the loans evenly.
    – Michael A
    Dec 18, 2014 at 19:25
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Not that I doubted everyone's assumption but I wanted to see the math so I did some spreadsheet hacking.

I assumed a monthly payments for 30 years which left us with total payments of 483.89. I then assumed we'd pay an extra $200/month in one of two scenarios. Scenario 1 we just paid that $200 directly to the lender. In scenario 2 we set the extra $200 aside every month until we were able to pay off the $10k at 7%. I assumed that the minimum payments were allocated proportionately and the overpayments were allocated evenly. That meant we paid off loan 5 at about month 77, loan 4 in month 88, loan 3 in month 120, loan 2 in month 165, and loan 1 in month 170.

Getting over to scenario 2 where we pay $483.89 to lender and save $200 separately. In month 48 we've saved $9600 relative to the principle remaining in loan 3 of $9547. We pay that off and we're left with loan 1,2,4,5 with a combined principle of about $60930. At this point we are now going to make payments of 683.89 instead of saving towards principle. Now our weighted average interest rate is 6.800% instead of 6.824%. We can calculate the number of payments left given a principle of 60930, interest of 6.8%, and payment of 683.89 to be 124.4 months left for a total of 172.4 months

Conclusion: Scenario 1 pays off the debt 3 months sooner with the same monthly expenditure as scenario 2.

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