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Hopefully the answer to this is general enough to be answerable out of the context of my specific loan/loan provider.

I have a student loan through the U.S. DOE, it is comprises 10 loan tokens of various amounts (equaling ~$30,000), interests (3%-6%), and about half subsidized/half unsubsidized.

My minimum payments are $325 a month, per my loan agreement my interest gets paid first let's take last months example of $96 leaving me $229 for principal. Here's where I get confused. That $229 is being split evenly across all of my 10 loans paying roughly 8% of the principal on each. This is leading to some of my high interest/low balance loans getting $7 off their principal while lower interest loans get much more. Surely, I figure, I would be able to pay off my loans much quicker and with less total interest accrued if all of the remaining $229 was put toward the highest interest first.

I emailed my provider asking them why it was this way and if it could be changed and they very shortly stated it isn't possible because:

The regular monthly payment goes first to accrued interest, and then is prorated over the loans within the account. This is necessary in order for your student loans to be paid off in the allotted time, as indicated in your master promissory note.
Italic emphasis theirs on "prorated"

Looking in my promissory note the most related thing I can find is:

Standard Repayment Plan
Under the Standard Repayment Plan, you will make fixed monthly payments and repay your loan in full within 10 years (not including periods of deferment or forbearance) from the date the loan entered repayment. Your payments must be at least $50 a month ($600 a year) and will be more, if necessary, to repay the loan within the required time period.

Which makes sense and with my plan it seems I would meet that 10 year mark faster.

So I ask you:

Why are they insisting my payment must be split this way, is it truly beneficial to me, would I not meet my 10 year mark if done my way? Or is it just the standard way to pay that I signed a contract to. What does the emphasized "prorated" remark have to do with it?

EDIT: note about current payment plan:
I'm currently only making the minimum monthly payment. Also it is stated by them that any additional subsequent payments during the same billing cycle can be applied however I like.

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    Are you only making the minimum payment for the 10 year period, or are you paying additional amounts? – mhoran_psprep Nov 8 '16 at 19:28
  • I'm currently only making the minimum monthly payment. Also it is stated by them that any additional subsequent payments during the same billing cycle can be applied however I like. – DasBeasto Nov 8 '16 at 19:30
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    You seem to have given your own answer. For each of the items, there is some minimum. (Which MUST be paid that month, for that item.) If you simply add those ten items, you get the "overall minimum" - which you're paying. Nothing much more to work out here right? – Fattie Nov 8 '16 at 19:37
  • @JoeBlow I'll have to look more closely at the agreement but to me it seems the $325 is the minimum of the collection of loans, not individuals, that they concluded it would take to finish paying under 10 years with their current strategy. It seems to me there is no reason the strategy can't be changed for the underlying loans as there is not contractual minimum as long as that 10 year mark is still reachable. – DasBeasto Nov 8 '16 at 19:42
  • Das - honestly I think it's this simple: imagine each of the loans A .. J. For each of those loans, ask the loan-maker "What is the monthly payment to pay it in ten years?". For each loan A .. J there would be an answer (A:$57, B:$71, C:19 .. etc J:$42.) Add those up and you get $325. That's all there is to it bud. Each loan must be (of course) paid it's minimum. What would yo do to say "loan C" - tell it "oh we're not going to pay you for awhile" ..? – Fattie Nov 8 '16 at 19:59
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The way they calculate the minimum monthly payment for each loan is to determine the payment due based on balance, interest rate and how many more months are left. They then add it up for all the loans and tell you the total.

If you want to pay it off faster, then you have to pay more than the minimum. You would then tell them which loan or loans should get the extra funds.

  • So total minimum monthly payment is based off the effective minimum monthly payment of each loan, even if you were to be able to pay off the total loan faster by reallocating funds toward the higher interest? Seems disadvantageous. – DasBeasto Nov 8 '16 at 19:48
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    You signed a contract that said I will pay them off in 10 years. They have calculated for each loan how to do this. They don't want you to fall behind on most of the loans so you can overpay in the early years one loan. – mhoran_psprep Nov 8 '16 at 19:49
  • Understandable, but as long as interest is still paid and they kept the overall minimum mandatory it's not like the deadline wouldn't be met. But I do see why the individual loan provider wouldn't approve. Perhaps I should look at consolidating them somehow? – DasBeasto Nov 8 '16 at 19:53
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    "but as long as interest is still paid......." For one of the loans, say "F" - the F people don't give a toss about you "paying the interest" dude. The F pepole want you to pay whatever the official minimum is on F each month. It's just that simple! Each of the ten loans A .. J has some minimum (forget your talk about "interest" or whatever) - the amount you're paying is simply the sum of those ten. – Fattie Nov 8 '16 at 20:00
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    @DasBeasto consider if you had two credit cards at the same bank. You couldn't pay nothing on one card and double your payment on the other card to pay it off faster. They're two completely separate accounts, even though they are similar in purpose and have the same lender. It sucks, but that's how student loans are structured. – Kat Nov 8 '16 at 20:55

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