I have a student loan that I’m paying off in perpetuity. After a time a few years ago when they raised my monthly pmt amount, citing changes in their estimate of how much they’d need to charge me in order to attain zero-balance at the end of the timeframe, I decided to get ahead of the curve and pay slightly more each month.
I’ve been underemployed then unemployed then once again underemployed during the last year and missed a few payments. I was enough ahead that doing so didn’t put me in arrears with them before I resumed regular payments.
For over 6 months, the principal debt hasn’t budged.
Their FAQ indicates that this isn’t something I should regard as unexpected:
I never took financial math.
Can someone please explain in the simplest terms possible why me being paid ahead and then having an interruption of payments has kicked me into this mode where my payments no longer affect the principal? Will they once again start having an effect on the principal after some point, and can I predict that point?
The only positive feedback for paying off a debt is seeing the amount owed go down
It’s hard to say without knowing the details, but my guess is that they added the interest from your missed payment to the principal of your loan (it is called interest capitalization). Now you’re paying that down and unable to impact the actual principal of your loan.
Though this wouldn’t have anything to do with whether you paid ahead or not. If you don’t make payments, your principal doesn’t go down regardless of whether or not you’ve paid ahead. You just might not get a threatening notice since your lack of payment is offsetting the loss of interest income from prepaying.
I am not a financial genius or anything, and I suspect the answer appears in the terms of your loan and specifics you haven’t mentioned, but my guess is that the amount over your regular payment that you made every month was applied to the principle on the date received. When you stopped making payments, your account was delinquent. The interest portion of your loan(s) just added up and your payments now are just going to pay the interest on your outstanding principle and reducing your delinquency. Once you have reduced your delinquency to zero, subsequent payments in excess of your interest will be applied to your principle.
You might be able to get your lender to roll your delinquency into your principle, depending on your loan terms, but that would probably have you paying more in the long run, as it would increase your principle and you would have to pay interest on it. If you haven’t been delinquent for very long, it is probably best to just continue the way you are going.
But, you should probably contact the lender in charge of your loan, as they will probably have better answers.
If you were allowed to apply extra payments to future payments due (sometimes they insist you make your monthly payment even if you paid ahead in the past), that doesn’t change how the calculation of interest and principal works. You paid extra and it was applied to principal. This reduced the amount of interest that you were charged each month. But when you stopped making payments, the interest accrued and wasn’t paid. It sounds like they keep track separately of interest and principal owed, which happens sometimes with loans but for no good reason that I can discern, and so they reported your principal balance as remaining the same while you were paying off the interest that accrued that wasn’t paid. Your total balance was going down, but the very poorly defined “principal balance” was not because all your payments were being applied towards unpaid interest. In the end it really doesn’t matter unless for some reason they were unable to charge interest on the interest. I suppose it might matter for the bank’s taxes, as principal repayments are treated differently than interest payments, and so since they need the data structure to support those calculations some statement designer decided to report your balance owed in that way instead of telling you what you owed in principal and back interest.
Yes, as discussed above, unless it’s something weird. They should be able to give you a statement telling you what you are paying down, how much you owe, and how fast you are paying it off. When you line up with the regular schedule again, you should go back to payments having the regular effect. Unless it’s something weird.
Can you point us at the lender and the FAQ?
I worked in finance for a while. I don’t discount the possibility that your lender is doing something weird.
