bank math extra student loan payments

Avoid shady “Bank Math” with your extra payments

Michael Lux Best Of, Blog, Student Loans 4 Comments

Are you paying more than the minimum payment on your student loans?  Great choice!  The money you save on interest in the long run will make your sacrifices of today worth the effort.

However, you need to be careful about how you apply your extra payments to your loans.  Banks and lenders are in business to make money, and they always act with this goal in mind.  That means that what might seem like logic or common sense to you, isn’t even considered by your debt holder.

Where does the extra money go?

When you make payments in excess of your minimum, most people make the rational assumption that it is applied to your principal balance.  Unfortunately, it isn’t always the case.  Lenders have a number of different tricks they can use to see to it that your extra payment helps you as little as possible.

Things to Watch Out For

Paying down the low interest loan first – Suppose you have two student loans with a lender.  One at 3% and one at 9%.  Most people would want to apply their extra money towards the higher interest loan.  Going this route will save the most money in the long run.

Lenders are experts on interest and making it work for them.  If you don’t give specific instructions when you make your payment above the minimum, your lender could apply it to the low interest loan.  They don’t care if that loan gets paid off early.

Even if your lender isn’t devious enough to apply the extra money towards your low interest loan, they might split the extra payment 50/50 between your two loans.  This option isn’t as bad, but most borrowers are best served by paying off the high interest loan first.  Additionally, most debt repayment strategies involve paying the minimum on everything, and using all your extra cash to eliminate a loan.

Prepayment on future bills – Another lender trick is to use extra funds as “prepayment” of future interest.  This especially devious practice helps extend the life of your loan and results in the borrower paying far more than necessary.  When you pay extra, you want the extra money to reduce the principal balance on your loan.  Most people don’t pay their September, October and November bills in a huge payment in August, but that is what some lenders will assume.  Always double check your statements to make sure you payments to end up getting treated as “prepayments”.

How do I give my lenders instructions?

Some lenders are far less devious and their website makes it easy to specify how much money you are applying to each loan when you make your payment.  Others make it very tricky.

Because there is no fool proof method, you can apply a number of different tricks to make sure your payments are accounted for correctly.

  1. Call your lender right before you make payment.  Tell them what you want and ask what needs to be done to make it happen.
  2. Send an email with clear instructions.  Sometimes you can include a note with your electronic submission.
  3. Watch your statements carefully.  Compare last month to this month.  If the numbers seem odd, give them a call.

Ultimately, it is important to remember the motives of the parties involved.  You want to pay off your debt as soon as possible, and your bank wants to collect as much interest as possible.  Keep this fact in mind, and make sure you keep your lender accountable.

  • Acespades

    This blog has been really helpful as there are many things posted they I was not aware of in regards to student loans. The vast majority of my loans private student loans through Sallie Mae. I fell into the trap of taking out much more than I could handle after graduation. I haven’t defaulted but have been paying my loan since 2008 totaling around 30k (eating up most my income since o started paying)but yet my balance appears to not reflect that. I hadn’t been talk checking the balance and how my mthly payment was applied to each loan. I had an auto deduct each month and had in the past checked constantly. The numbers don’t add up

    • Aceofspades

      Here it is

    • Aceofspades

      Can’t attach the document?

  • Acespades

    Sorry for the typos. Please see below, does the payments applied to each loan seem accurate. The principal and original loan amounts also never match up. I feel I cant trust Sallie Mae and should have been continuously checking over the years.