Tuesday, June 28, 2016

On Student Loans

The main goal of our tiny living experiment is to pay off our debt, which mostly consists of student loans. I wanted to talk about paying down our loans because I think everyone has different experiences and it probably largely depends on who holds your note. 

Chris's student loan is with ACS. They are a notoriously terrible company that people just can't get away from because they buy loans from more reputable banks (this is what happened to us). So you could refinance to get away from ACS, only to end up right back with them when they buy your note. 

For years, we've been paying the minimum payment on the loan because we trusted that the payment was structured such that we could pay it of before we were 100. But once we dove into our pay off plan and I started using the Snowball system, I wanted to make sure that all the extra money we were paying was going toward principal and not just pre-paying interest for the next 60 months. 

Here's a concrete example of how much ACS sucks: when we decided to make this loan the first one we paid off, we called ACS to make sure that extra payments went to principal. We got a customer service representative who spoke very poor English (not knocking him because he obviously speaks at least two languages, which is at least one more than me, but I am knocking ACS for employing customer service agents who can't serve customers). He may not have understood our question, but he straight up told us that all extra payments would be applied to principal. Uh, no. It turns out that ACS doesn't accept principal-only payments. 

So, I did some research and found this blogger who had encountered the same problem and had developed a pretty smart (and actually very simple) solution:
So let’s say your payment is due on the 15th, you make your usual monthly payment. On the 16th, call them and make the additional payment. Because no interest has really accrued in the one day since your monthly payment, every penny you send will go towards principal. I have done this and it works.
Yes, it does work. Interest is accruing daily; in our case, it's about $7.50 per day. You'll get the most bang for your payment if you make it on a day when no interest has been allowed to accrue, or maybe only a day's worth has accrued. 

I've been using this method for the last 6 months and it's actually amazing. In 2015, only 22% of what I paid to ACS went to principal. 78% went toward interest!!
78% went toward interest!!

Using the new method, 76% of what I've paid this year has gone to principal and only 24% has gone to interest. The great thing about this is that the amount of interest accruing each day will go down as the principal gets smaller. 

I don't know how other loan companies structure their payment plans. I hope most of them aren't shady as hell like ACS, but it's worth looking into if you have student loans that you feel like you're never going to pay off. 

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