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.
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.
08/02/2010 EDPay $1,000.00 $0.00 $15.17 $984.83 07/06/2010 EDPay $40.00 $0.00 $16.42 $23.58 06/07/2010 EDPay $50.00 $0.00 $18.31 $31.69 05/06/2010 EDPay $50.00 $0.00 $17.35 $32.65 04/06/2010 EDPay $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 Principal Outstanding Interest 10 Days Interest Total 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.