Reader Question: Nelnet Student Loans

I just recieved this question from Tim who writes over at The Econ Man:

Hello. I just ran across your blog and in reading this post, thought that maybe you would be able to help with a question I had about paying off loans early, and specifically nelnet loans. With nelnet, I’ve never seen the option to apply extra payments “towards principle.” I contacted them and they told me if I wanted to apply the extra toward the principle, I would have to mail in a check with those special instructions. I’m just not sure what happens if I pay extra without specifically telling them to apply it toward the principle. Do you know? I see that you’re paying off a nelnet loan and you don’t owe payments until April 2012. What happens when you finish paying off your loan? Is the loan paid off immediately, or does the original loan amortization schedule still play out?Have you paid any other nelnet loans in full? this simple thing really confuses me and it’s prevented me from paying extra on any of my nelnet loans.

Thanks,

Tim

As Tim mentions in the article, I do have a student loan from nelnet, and it’s currently my debt repayment target, because it’s the next lowest balance.   (I paid off my credit cards first, even though some of them had higher balances than this loan).  I mentioned last time that I made my first snowball payment to them (the amount was around $1,000) and then noted that I don’t have a payment due until April of 2012.  That means that they have tentatively applied my extra payments as “prepayments” of the balance due, and not applied the extra payment to the principal.  They pitch this as something helpful, but in reality it’s not.  Sure, if I lost my jobs I wouldnt have to pay them until April 2012, but I’d lose so much progress that I’ve made.

Nelnet actually does apply your prepayments to the principal, as you can see in the table below.  Most of the student loans that I have work in the following way:  You’ll pay them some amount (be it your regular payment or otherwise) and they will take that amount and pay off the interest that is currently owed on the note and will apply the rest to principal.

To explain an example from the table, my  normal payment is $50.  On June 7, 2010, I paid them $50, and there was $18.31 worth of interest on the note at that time.  Subtract the $18.31 from my $50 payment, and you’re left with $31.69, which they then applied to principal.  Similarly with my snowball payment of $1,000 on August 2, there was 15.17 worth of interest on the loan, and once that was paid, they put the rest towards principal.

08/02/2010EDPay$1,000.00$0.00$15.17$984.83
07/06/2010EDPay$40.00$0.00$16.42$23.58
06/07/2010EDPay$50.00$0.00$18.31$31.69
05/06/2010EDPay$50.00$0.00$17.35$32.65
04/06/2010EDPay$60.00$0.00$15.83$44.17

The way they (can) make back the interest that they lost is by telling you that you don’t  need to make a payment until April, 2012.  If you do this, all the interest that you didn’t have to pay now will accrue back onto the note if you don’t make a payment.  However, if you kept making payments, you’d pay off the note early.

Once you get close to having the balance almost paid for, you can request what they call a payoff quote (to find this for nelnet, click on “My Account” and above the payment info should be a link).  A payoff quote is basically a quote that says the current principal balance, the interest accrued currently, and estimated interest for the period that the quote is good for.  For example, nelnet will give you a payoff quote that is good for 10 days.  If you send them the money in the next ten days, your loan is paid in full.  Mine looks like this:

Current PrincipalOutstanding Interest10 Days InterestTotal Payoff Through 9/13/2010
$2,033.40$12.11$3.79$2,049.30*

So if I paid Nelnet $2,049.30 before September 13, my loan would be paid off (unfortunately I don’t have the resources at this time to do that).  Once this is done, the amortization schedule does not continue to play out.  You’ve excised the company from your life (if you only have 1 loan through them, like me) and you don’t owe them another red cent.  You can safely completely forget they ever even existed and move on to your next debt.

As far as paying any Nelnet loans off previously, I have not.  I will soon though, and I’ll let you know exactly how it goes if you like.

In my opinion, handling prepayment needs extra discretion and a clever planning. You can dig up some useful information about payment schedules of different student loans at Loans-advisor.com
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13 thoughts on “Reader Question: Nelnet Student Loans

  1. Wow! I’m glad Tim sent you this question because I had no idea this was how NelNet operated! I would have made my big debt payments and thought something was totally off. Thanks for all the information, Jeff! 🙂

  2. No problem. It was a little tricky to get my head around, but they are doing you the most good (clearing out the interest then putting all remaining to principle without it being specified) in that fashion, but they are also allowing you to forgo payments until the interest builds back up to where you made the original payment.

  3. The key with any type of student loan is if you can, pay if off as soon as possible. Not when they suggest you start paying and not the minimum payment.

  4. Thank you Jeff! I’m thrilled to receive a whole post as an answer. This information is great. It seems like choosing to pay of your loans this way is a better option. You get all the benefits of saving on interest and paying it off early, but you also gain security by being able to hold off on payments in case hard times strike. Unfortunately, I have 4 Nelnet loans, so it might be a while before they’re all paid off. The good news is that I will soon start paying extra.

  5. Glad that this answered your question Tim. I think I also prefer this way, as I dont have to call them and tell them to apply a payment to principal or to have them do whatever with it. It also makes a simple calculation for how much interest that you pay over the term of the loan.

  6. Hi, I was wondering if you know if it’s possible to payoff a WHOLE loan with Nelnet ELECTRONICALLY through using the “make a payment” option and just filling in the amount that the is given in the 10-day payoff through my checking account that is already linked to my loan account (for monthly payments). I don’t feel comfortable sending them a personal check to their p.o. box address. I contacted nelnet about this, but haven’t gotten a response yet. Any thoughts?

  7. Jeff,

    I’m in a difficult position. I have a consolidated loan with my ex wife. As part of our divorce decree she was supposed to make all payments and assume the debt. Of course she has been erratic in making payments and this has caused credit problems and inflation of the principal.
    We finally reached a settlement. Our mandated payment is around $500/mo. She kicked in $600 and I kicked in $400 a month. Nelnet applied the extra payment money to interest. She called them and requested all payment over the monthly minimum be applied to principal. Nelnet refused to doe this. I called and got the same response.
    I don’t know what to do. I will never be free of her until I get this resolved!
    Does Nelnet have to put extra payments towards principal upon our request? Since they have refused how can I convince them to do so? Thank you!

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