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Loan payment allocation
April 23, 2019
3:33 pm
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Michael
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Your repayment plan is not the most effective way of paying back student loans.

If a person has multiple loans of different interest rates, the best way to pay loans back is to pay off the monthly interest from all the loans, and then to allocate whatever money is left in that monthly payment towards the loan with the highest interest rate. Once that high interest rate loan is completely paid off, then principal payments should be made towards the loan with the new highest interest rate.
Any deviation from this repayment scheme results in paying more money.

Unfortunately, Navient’s default 10-year repayment plan, as well as many other of their plans, do not follow this simple algorithm.

I have addressed this issue with them, and their only answer is that I can direct “overpayments” to a loan of my choice. Basically, I have to pay each loan’s principal down a little every month.
They have told me that allocation of “overpayment” is the choice of the borrower, however, the borrower does not have a choice as to allocation within a given payment plan.
In a nut shell, Navient will not let the borrower allocate 100% of what is left after interest to lowering the principal of a single loan, and this ends up costing the borrower thousands more.

Has anyone else come across this issue with Navient or maybe even a different student loan servicer?
Have you been able to allocate payments more effectively than their default allocation?

Mike

April 23, 2019
3:43 pm
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Indiana
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Forum Posts: 328
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May 3, 2014
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Hey Mike,

Most lenders will not allow interest only payments like what you proposed to Navient. The number to look at is the repayment length. If a loan is going to be paid off in 10 years, a borrower will have to make payments to cover the interest and put a sizable dent in the principal. Lenders treat each loan independently and will require principal and interest payments on each loan, this is not unique to Navient. Generally speaking, we only see interest only repayments as an option for borrowers who are still in school and have not yet entered repayment.

The trick is to get the payments as low as possible. This can be done by either extending the repayment length (stretching out repayment over 20 years will be much closer to an interest only payment than a 10 year repayment length), or getting a lower interest rate. Finding lower payments on the lower interest loans will free up more cash to attack the higher interest debt. The strategy to get thinks paid off as quickly as possible is outlined here: https://studentloansherpa.com/pay-student-loans-quickly/

Best wishes,

Michael

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