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Understanding interest and overpayment
February 9, 2016
10:30 am

I had 41,000 in loans in a 25-year extended fixed repayment program. I currently have 21.25 years left in the term and a 39,000 balance. After paying the minimum for about three years, I’ve started getting more serious about paying them off. According to my most recent repayment terms document, I have 255 remaining payments totaling 53,630.10. Every repayment calculator and student loan payment estimator I’ve used, however, shows that my current minimum payment (212.42) would take far, far longer than 21 years to pay off the loan with far more interest than ~14,000 interest. I’ve contacted my loan servicer (Navient) with my concern that my loans will not be paid off within the term at the current payment, however they assured me that their math was correct and the payment was right. According to my calculations I’d have to pay off my loans very quickly to end up paying less than 14k interest, at a rate more than I can currently afford. From what I can tell, overpayments speed up the process but do not affect the total amount to be repayed (i.e. paying double reduces the number of payments owed by two and the total amount of payments owed by exactly 424.84, but does not seem to save on future interest; paying less than a full extra payment does not affect number of payments and reduces the total by far less that the amount of the payment).

So I guess I have two questions – why do I owe so little interest/what am I missing in the math? And will I save any money by overpaying, or just time?

February 9, 2016
10:05 pm
Forum Posts: 351
Member Since:
May 3, 2014
sp_UserOfflineSmall Offline

Ok… I’ll start at the beginning on interest.

It is calculated on a daily basis. You take your interest rate, divide it by 365, and multiply it by your balance. This is how much your balance will grow each day. If you look at your bill, they are just adding up all of the days for the interest payments.

By overpaying each month, you lower your balance quicker. Lower balance means less interest. That means that in addition to saving time, you also save money by making extra payments.

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