Ned and Darla: A Nerd’s Guide to Student Loans

If you read the previous Ol’ Ned post, I’m sorry.

As my smokin’ hot wife pointed out, it was prematurely posted, for I received new information later in the same day that pertains to student loans.

And I left out some stuff.

Some good stuff.

Let’s try it again.  And this time I’ll spare you the ridiculous intro.

Ned really did ask me if he should pay off his smaller loans or bigger loans first (student loans).

Ned’s case is similar to mine: a lump sum payment that consists of multiple sub-loans with different interest rates assigned to them.

Example:

Ned’s loan breakdown might look something like this,

$1500 @ 6.8%

$3300 @ 5.4%

$6000 @ 4.8%

$2000 @ 6%

And so on and so forth.  I assure you it looks way worse though.

Ned’s monthly minimum payment will be each of the sub-loans monthly payments broken down individually after applying compound interest DAILY and dividing by 120 (10 years, 12 months per year).  Then those payments will be added together.

$1500 @ 6.8%  –> $24.67/month

$3300 @ 5.4%  –> $47.19/month

$6000 @ 4.8%  –> $80.80/month

$2000 @ 6%    –> $30.37/month

total = $183.03/month

If you don’t believe my numbers, look up the compound interest formula and plug the numbers in for yourself.  But you should just trust me.

Compound interest is the 8th wonder of the world.  He who understands it, earns it…  He who doesn’t, pays it.  —  Albert Einstein

Sometimes certain loans will not begin accruing interest until you’ve graduated.  Some will begin as soon as you get them.

Those numbers would get tricky.  So for the sake of time and my sanity, the above numbers were configured assuming that Ned’s interest began to accrue the day he started paying them off.

Which to my knowledge never happens.

(Look up the difference in subsidized and unsubsidized loans.  One starts accruing interest immediately and the other doesn’t.  Or somethin’ like that.)

A crappy characteristic of loans is that interest comes off first.

This process has a fancy name, but I’m not going to use it because it’s dumb.

(Unless it pays me)

Seriously, I’m not fully educated on the true meaning and really these terms only make things more confusing.

Brilliant business plan really.

“So who is our target customer?”  –  dude 1

“The common folk.”  –  dude 2

“Well then we need to make up some words so we can rob them legally.”  –  dude 7

The best way to deal with it is to not look at how much of the minimum monthly payment is interest and how much is principal.  You won’t like it.

They know exactly how much money you will owe over the course of 10 years if you pay the minimum.  That’s how they determine those monthly payments.

Look at this:

$1500 @ 6.8% with a minimum payment of $24.67 over 120 payments is what??

$2960.63

That’s a lot of interest.  Nearly double the loan.

Listen peeps, I understand profit.  I’m for it.  Profit is necessary for an economy to grow and be sustained.  But often times it does not sit well with me, particularly when the powerful feed on the powerless.

Because make no mistake about it, someone is getting filthy rich off of your debt.

Back to Ned’s question, which insinuates that he is very well aware that he needs to combat the federal government…

I mean his student loans…

Let’s say Ned is on month #1 of his loan payoff, so he owes $183.03.

Pay it.  Let it clear the bank.  Let it clear the student loan website (I can’t use company names in my posts, so let’s call them Sallie Mae, or Navient, whichever you prefer).

Once it’s cleared, go back and make another payment.

Let’s say Ned has $200 over the top in month #1 that he wants to put towards his loans.

The reason you need to make 2 separate payments is because if Ned wanted to make 1 payment of $383.03, it would all be dispersed the way Sallie Mae wanted it to be dispersed, which will be spread out over all four loans.

And we don’t want that.

We want to focus on one at a time.

So Ned will go back and will now be able to apply all $200 toward whichever sub-loan he wants and it will go 100% to principal.

So…

$1500 – $24.67 = …. not $1475.33

I really don’t know how much of the payment is interest, and I can’t find it ANYWHERE on the search engines (not mentioning any until the pay me), but it’ll look more like $1495.

Sickening, I know.

But after applying $200 to this loan, it looks like $1295!

Now when Ned comes to month #2, Sallie Mae is going to say his monthly payment is $158.36.

Sallie Mae does not want you to make another payment towards the $1500 loan this month.  They want it to continue to accrue interest.

So always ALWAYS ALWAYS budget for your original minimum monthly payment.

Pay the minimum in month #2 ($158.36).  Then go back in once it’s cleared and pay $24.67 (your original minimum anyway) towards the $1500 loan.

You haven’t gone over your monthly budget.  And you’re fighting interest.

Fight the good fight!!

Dang, I still haven’t answered Ned’s question.

Small loans or big loans first?

I say small.

You could do the bigger loans first.  It may not make a ton of difference either way.  But which one seems more attainable?

In my case, the smaller loans had the higher interest rates, but I’ve been made aware that this is not always the dealio.

Without discussing numbers, I advise you to pay off the smaller loans first because it’s quicker, easier, and ADDICTING!

You’ll see after that $1500 loan goes away how exciting it is.  You’ll see an end in sight.

So there ya go, Ned.  Now tell everyone to subscribe to my website.  I know people are in debt.

Onward to Darla.

You should know by now that Darla is not her name.  But she is real.  And she really did ask me about her student loans.

Darla is less than a month away from completing her master’s degree.  Very awesome for her.  I can’t wait for her raise so she can fix her oven and we can continue family dinner night.

Just kidding.

About some of it.

Darla has a single loan, and it is already accruing interest.  She read the original Ol’  Ned post and asked if she needed to make two separate payments on hers.

She does not.

But I still would.  Because I like to be absolutely certain that my principal only payment is, in fact, principal only.

But it most likely won’t make a difference.

And if you are in the same situation as Darla, a second payment in the same month will likely result in the following month to show a balance due of $0.

That’s ok.  Just make sure you still  make a payment.

Don’t ever miss a payment.  And don’t ever be late.  In any type of loan.  Or bill in general, for that matter.

Eat saltines and drink water if you have to.

Make sure that wife and baby are well-fed though.

One thought on “Ned and Darla: A Nerd’s Guide to Student Loans”

  1. Good stuff. If I may add something. When you send the 2nd/principal check write ‘principal payment’ in the lower left of the check. Lowers the risk of confusion. I have received calls from institutions wanting to know why I sent a extra payment. peace

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