I’m paying off my law school loans. I’m paying considerably more a month than required, so at this point I’m about 2 years ahead in my payments. Because I don’t actually “owe” anything that’s due each month, my loan company (PHEAA) seems to randomly determine which portion of my payment is assigned to which of my six loans.

I figure they must be trying to screw me, but I can’t figure out how. I have four larger loans, and two small loans, all at the same rate. In terms of the total interest I’ll have to pay, does allocating more or less to an individual loan make a difference? I can direct them how to allocate my payments. Should I?

Thanks in advance, and I’ll talk to yas in the morning,

Sua

If they’re all at the same rate, it doesn’t matter how you allocate the payments. If the rate is really low, you’d be better off not paying them early, and taking the extra money and investing it, or paying off any higher-interest debt.

Arjuna34

If they’re all at the same interest rate (and all are fixed, or all are variable based on the same formula), there is no mathematical difference in paying one off faster than another. 8% interest on one loan of $10,000 is no different than 8% interest on five loans of $2,000 each-- it’s either $800 or 5 x $160 each month = $800. Same same.

In all likelihood, your minimum payment each month is simply a slightly higher percentage of the outstanding balance than your interest rate. In other words, if you’re paying 6% simple interest a year, that’s 0.5% interest per month. In that situation, you minimum payment might be 0.70% of your balance, so that you are slowly decreasing your overall principal balance. Paying more than the minimum on one account reduces the principal on one loan, but doesn’t covering the accumulated interest on another. Since they’re all the same interest rate, it’s a zero-sum game. You’re not getting screwed no matter how they allocate it, unless they’re not crediting your payments correctly.

If it were up to me, I’d have them allocate everything over the minimum payment due to the lowest balance account first. Eventually, you’ll retire that one, and will be down to only 5 loans, then four, etc. Sure, your last few loans will be the biggest, but psychically, I find it easier to make a big payment on one loan each month rather than four little payments on four loans.

Thanks for the responses, people. I guess my paranoia (and innumeracy) got the best of me.

Sua

One other thing about having them pay off the smallest loan first. It will probably look better on your credit report if you have fewer loans, so there’s more than psychological reason to pay off the smallest one first.

Brian