In this edition of the student loan plan, we take a look at Lindsey’s private student loan dilemma.
She shared that she has one loan with an interest rate above 10%. While this rate is outrageously high, it is also surprisingly common. If you want tips for dealing with your student loans, contact us.
Lindsey’s High Interest Dilemma
I have a $17,000 student loan with a fixed interest rate of 10.375%. When I spoke to someone from Sallie Mae, rather briefly and with very little assistance, I was merely told I had to pay the interest first. The estimated 196-month repayment total is $41,769.15.
First, this is terrifying. Second, it is criminal.
A total necessity, regardless.
Is repaying a student loan like paying my car loan? I make my monthly payment of $210 but I add an additional $100, which goes straight to the principal, shaving a little extra off every time. Am I stuck with a $42,000 loan to pay off or is that just an estimate if it takes me the full 196 months?
Answering Lindsey’s Question
Our reader seems to be the victim of a customer service representative who wasn’t terribly clear about what she was explaining.
The rep was correct in saying interest payments had to be made first. When a borrower makes a payment, a portion of that payment is applied to the interest that accrued over the previous month. Once the new interest has been paid off, the remainder of the payment lowers the principal balance. Thus, Lindsay could pay the extra $100 per month to eliminate the debt faster and spend less on interest.
In other words, Lindsey is not stuck paying the $42,000 in interest. That figure was calculated assuming she makes the minimum payment each month over the life of the loan. However, if she wants to avoid that huge amount of interest spending, she needs to take action.
The Plan – Knock out the Debt ASAP
Lindsey has already identified the major issue. Having an interest rate above 10% means she will be paying more than double the original loan balance before her debt is gone.
Treating it like a car loan is an excellent approach and may be the best one for Lindsey’s situation. With a 196 month repayment, the early payments will almost entirely be going towards interest. Adding an extra $100 each month will go straight towards the principal, and it will get the loan paid off faster and with far less spent on interest. (Side note: if you do pay extra be sure to give your lender specific instructions that the extra payment is to be applied to principal rather than future payments).
The sooner that loan is paid off, the sooner the 10% interest rate is history.
An Alternate Route – Finding a Lower Interest Rate
Another way to get rid of the 10% interest rate, and Sallie Mae, would be to refinance the loan with another lender. The advantage of going this route is that your interest rate could be dramatically lowered. Lower interest rate means a higher portion of your monthly payment will be applied towards your principal balance.
Unfortunately, this route only works if you have a good credit score and income. The companies offering refinancing services focus on the borrowers who will be low risk. When Lindsey took out her loan originally, Sallie Mae knew it was a necessity for her, and they were able to charge a higher interest rate. If Lindsey shops around, she can take advantage of market competition as well as the low-interest rates in the current economy.
A Final Option – Getting Lender Help
If your credit score or income isn’t enough to get a lower rate with another lender, you may be able to convince Sallie Mae to lower your rates.
For borrowers who are struggling to repay their loan, Sallie Mae offers a Rate Reduction Program. The program is set up to help borrowers stay current on their loans who otherwise wouldn’t be able to make payments. The big perk to this program is that Sallie Mae will lower your interest rate to 3% or less for a year at a time, but it can be renewed each year.
If you find yourself in a similar situation to Lindsey, it is important to recognize your enemy. It is not the monthly payment. The real enemy is the ridiculously high interest rate. Use whatever tools you have at your disposal to either lower the rate or pay the loan off as aggressively as possible.
Best of all, try to get a lower rate AND pay it off as fast as possible.