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Independently Financed

Independently Financed

One weird old trick to save money on student loan interest

November 3, 2017 by indyfinance 7 Comments

Back in September I wrote about how structuring your borrowing and investing decisions properly in the first place is superior to continually trying to optimize and re-optimize them. However, there’s an important corner case where you’re able to optimize your post-borrowing behavior, and that’s the case of student loans.

Depending on a number of factors including the prevailing student loan interest rates when you were enrolled, the number of years you took to graduate (or drop out — we don’t judge around here), and the student loan repayment regime when you were enrolled, you might have a number of federal and private student loans with different interest rates and different repayment options.

For loans which are eligible, I’m the world’s biggest proponent of “income-based repayment,” or IBR. Your payments are capped at a percentage of your income, and any remaining balances are forgiven at the end of the IBR repayment period.

However, folks who know they won’t be eligible for IBR loan forgiveness (or the public service loan forgiveness program) may understandably want to accelerate the repayment of their student loans. That impulse may become even more tempting if the Republican Party succeeds in their effort to repeal the federal income tax deduction for student loan interest, which would almost double the after-tax cost of student loan interest for high-income borrowers.

Send your student loan processor written instructions on how to process payments in excess of the minimum

Thanks to the consolidation of the federal student loan program under President Obama, there are relatively few student loan servicers today, but each has somewhat different methods of processing payments in excess of your monthly minimum owed.

If you don’t know how your student loan servicer processes excess payments, you may be shocked (or disgusted) to learn that they are not required to apply payments in excess of your monthly minimum to your highest-interest balances. They are, legally, free to apply excess payments to your loan balances in any manner they choose — unless you instruct them otherwise.

So, instruct them otherwise! The Consumer Financial Protection Bureau has produced a draft letter you can use to specify exactly how excess payments should be applied to your student loans. Read it carefully, fill it out with your own personal information and preferences, and send it by certified mail to your loan servicer. Then check with them in 10-14 days to make sure they’ve received and applied your instructions to your account.

Filed Under: student loans

Reader Interactions

Comments

  1. calwatch says

    November 3, 2017 at 8:10 pm

    I’ve found that for most higher income professionals, the student loan deduction phases out too early to be of any benefit. It phases out at $65,000 to $80,000 for a single, double that for married filing jointly.

    Reply
    • indyfinance says

      November 4, 2017 at 12:13 pm

      calwatch,

      That’s no doubt true for high-income W-2 employees with limited ability to manipulate their adjusted gross income. Since the limit applies to line 22 income minus lines 23-32 deductions self-employed folks should be able to earn substantially more than that and still take the deduction.

      —Indy

      Reply
  2. WR says

    November 3, 2017 at 10:51 pm

    Jeez, don’t make your political leanings too obvious. We get it, you love Obama, and Republicans are evil, right? How about just write about student loans instead. You could have actually used the space to write something of substance. Oh wait, then the article would have been about one sentence long!

    Reply
    • indyfinance says

      November 4, 2017 at 11:58 am

      WR,

      What is your specific objection? Do you think the Republican tax reform bill does not repeal the student loan interest deduction? Or do you think that student loan servicing wasn’t streamlined under Obama? How can I write about federal student loans without writing about the policies of the federal government?

      —Indy

      Reply
  3. NiceSharky says

    November 4, 2017 at 3:05 am

    To be fair, I don’t think he ever claimed to be unbiased… But I agree it’s tiring to filter out so much of this bias. Student loan deductions have been useless to anyone becoming a “professional”.. but the Trump rally should help many avoid loans in the first place!

    Reply
    • indyfinance says

      November 4, 2017 at 11:59 am

      NiceSharky,

      Indeed I don’t know what it would mean to be “unbiased” between right and wrong or between the truth and lies.

      How will the Trump rally help many avoid loans in the first place?

      —Indy

      Reply

Trackbacks

  1. The low-hanging fruit of personal finance - Independently Financed says:
    November 5, 2017 at 7:54 pm

    […] Friday I wrote about how people making payments in excess of the minimum to student loans need to make sure their student loan servicers have instructions to credit the […]

    Reply

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