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I have the following loans:

A) $12,818 @ 9.25%

B) $11,499 @ 2.25%

C) $10,059 @ 2.25%

D) $ 3,365 @ 10%

I recently received a $5000 inheritance so I would like to allocate this in the best way possible. It seems to me it is best to put it all towards loan A. Although it does not have the highest interest rate, it has a much higher balance than loan D, so it should be accruing more interest anyway, correct?

Now, when I go to Navient's website to repay it and make more than the minimum it says the following:

When you pay more than your Total Payment Amount, the extra funds will be applied to your balance. Unless you make your payments through auto debit, extra payments will reduce the amount of any future payments. For example, if you pay an extra $50 and your regular monthly payment amount is $100, your next payment due will be $50. If the extra funds are more than the next monthly payment(s), your billing statement(s) will show zero due. Even if you have a zero amount due on your billing statement, continuing to make payments will reduce your total costs of borrowing.

I want to pay 100% of the excess payment towards the principal, NOT to future loan payments. I would rather have to continue making my monthly payments towards a principal that has been reduced by my one lump sum payment. I don't want credit towards them because then aren't I paying interest on a higher principal?

Furthermore I want to be able to do this without signing up for auto-pay. I don't ever want anyone to automatically bill my account.

Does anybody have any experience with Navient and know how to do this? I already called them and they seemed to talk in circles saying "It will go towards your future payments, that's just how the system works" Don't I have the right to allocate my payment however I want provided I meet the minimum payments? I want to be billed each month for interest calculated off of a principal that I have reduced with my $5000.

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Based on their website, it's fairly clear that they will apply the overpayment to the principal. When they say they will reduce future payments, what they mean is that they'll reduce your obligation to make future payments - so if you pay 2x the current payment, you wouldn't be 'past due' if you miss the next payment. You still reduce your principal by the full amount.

See this image:

The second section is what you're planning to do.

If you want to be entirely clear, I suggest mailing a check (not doing this online) and including on the piece of paper exactly how you want the money distributed. Since you want to reduce a specific loan, then you need to say exactly what portion of the money goes to that loan.

You are incorrect, by the way, in suggesting to reduce the 9.25% interest rate first; you should pay off the 10% rate first in its entirety. Yes, the 9.25% loan will generate in total more interest, but the same $3500 will generate more overall savings in the 10% loan. Always pay off highest rate first, no matter how small the actual amount is.

To give this a visual persepctive, you can imagine your debt as one continuous bar like so: interest rate graph

Basically, you owe a total of $38k or so, and the highest $3500 or so is at 10%, the next 12k or so is at 9.25%, and the next 22.5k is at 2.25%. You want to pay from the top down where possible, because the higher on that bar the more interest it's generating. Lop off that green bit and a bit of the red bit, and you'll be better off than solely taking 5k of the red out.

  • Thanks for highlighting how the repayment works. There's a lot of info on the site and I always viewed them as sort of an evil company so I feel the need to always be skeptical of interacting with them, especially when it comes to large amounts of money like this. I don't see how paying off the 10% generates more savings though if it generates less interest. Is there a mathematical formula for this? – greggle138 Jan 6 '15 at 17:21
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    It generates more interest for that $3,365 then the same $3,365 does in your larger loan. Don't forget, you're not paying off the entire $12k of that loan - just $5k of it. Instead putting $3,365 (plus a bit of additional interest) towards the highest interest and then $1,600 or so towards the 9.25% interest loan will give you the highest savings. – Joe Jan 6 '15 at 17:27
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    @greggle138 You are paying 5000 either way, so you want that 5000 to make the most difference. If you put it all towards A, you're reducing your debt by 5000@9.25%. If you put 3365 towards D and 1635 towards A, you're reducing your debt by 5000@9.75% (weighted average of both interest rates). – Nathan Jan 6 '15 at 18:55
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    Re: "obligation to make future payments - so if you pay 2x the current payment, you wouldn't be 'past due' if you miss the next payment." Worth mentioning IMO, the reason lenders do this is not to cut you a break. If you skip your next month's payment, the interest for that month is added to the principle, increasing your remaining balance. Then, subsequent months compound on top of this increased amount. The final interest you pay is still less than if you didn't make the windfall payment, but significantly more than if they required you to continue making your regular, monthly payments – Dacio Jan 6 '15 at 21:40
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    @MooingDuck: But in this case, the highest interest rate is the smallest amount! – Micah Jan 7 '15 at 1:01
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First, congratulations on putting your inheritance toward debt! Debt can be a psychological ball and chain. You are on your way to freedom.

Question 1: Do I prepay (A) or (D)? As a general rule, you want to pay the highest interest rate off first, regardless of the outstanding balance. You will want to pay off (D) $3365, and then put the remaining $1635 toward (A).

Question 2: For this, I contacted Navient and the customer help said that you do the following:

  1. First, make a monthly payment on the loan. Then in step 4 you can make payment on principle.
  2. Go to the loan you will pay off (D) and find what the payoff amount is for the loan.
  3. If you will pay online, select 4-day payoff (because that's how long it takes to settle). If you will send in a check, select 10-day payoff (takes longer by mail)
  4. After you have made a monthly payment, you may go back in to make a second payment. The system will ask "Will this be a future payment?"
  5. Answer "NO" because you are making a payment on principle.
  6. Make the payment of the 4-day payoff amount.

  7. For Loan (A) follow steps (4) & (5) then put the balance of your $5,000 toward Loan (A)

  8. The loan company will credit your account within four days (if paid electronically) but it may take 30+ days for you to receive a notice in the mail that the loan is completely paid off. You might also receive a small check for over payment of interest.

Keep up the great work!

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Well I am liking some things about the way you are thinking. Mainly, you want extra payments to go to principle and you want to reduce your debt. One thing you are not quite getting there on, is that many times the people working the phones at loan companies are kind of dumb. You sense that, but you are probably too polite to make that conclusion.

What you are experiencing is kind of common. I answered another question that was similar to this. I think you have a two options:

  1. You could attempt to refinance the loans. This is going to be tricky as you will want to make sure you can make extra principle payments. The tricky part is trying to find a customer service person that can understand that and can answer accurately.

  2. Stick with this one, and save money until you have enough to pay off a loan. This option, of course, means you will be losing the mathematical interest rate battle. You might save money at .89% while paying as high as 9.25%. However, it may not be as bad as you think. You'd have to do the math on your savings rate, and pay off rate.

If I was in your shoes, I would use the inheritance to pay off the smallest loan which would leave you about $1700. I would stick that in a "high" yielding savings account and save like a mad man to get loan A paid off. My goal would be to be done with it this time next year. This would mean saving about $900/month. I'd pick up a part time job if I was unable to do so. Keep in mind your payment should be reduced as you would not have loan D, so that will help some.

Once that is done, your savings rate and loan interest rate differential is pretty low, so it will not be as painful knocking out the other two.

  • How exactly do I go about refinancing the loans? The 9 and 10% interest rates seem absurd to me considering I simultaneously seem to qualify for 2.25%... I don't care about consolidating my loans into one, but if I could reduce the interest on those two it would be great. And being able to make payments is not an issue. I take home something like $5500 per month after taxes which I am likely overpaying. I'm just 100% about winning the mathematical battle. – greggle138 Jan 6 '15 at 16:45
  • This may be tough to imagine but your behavior and desire to pay it off is more important then winning the mathematical battle. Some are better off paying off the highest interest rate last as they will tend to remain more focused. I used www.nthea.com to refi my student loans. They had a nice incentive. If I made all my payments on time, they reduced the interest rate slightly and took care of the last $500. That might help you with the math, or it might not make math sense to refi. And people say you don't need algebra. – Pete B. Jan 6 '15 at 16:54
  • The 9% and 10% loans are likely private loans (and probably from a while ago?) while the 2.25% are likely Stafford or similar loans which are government-backed loans (ie, the government pays the lender if you default). – Joe Jan 6 '15 at 17:05
  • These are actually all private loans. I did not list government loans as their interest rates were low enough that they weren't in consideration to repay with this money. – greggle138 Jan 6 '15 at 17:25
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    Hmm, that would surprise me. I don't mean loans from the government (ie, Perkins loans), but those rates look like Stafford loans to me (which are guaranteed by the government, but made by private lenders). Although that's based on my loans from way back when interest rates were higher, so perhaps private loans are lower. In any event, your interest rate was determined when you initially signed on to the loan, unless you got a variable rate loan - and if they're variable rate, refinance now as interest rates aren't going to go anywhere but up. – Joe Jan 6 '15 at 17:38

protected by Community Mar 21 '15 at 17:30

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