phase one of smarp activated

February 18th, 2008

Phase One of SMARP Activated

Is that title odd enough for you? :)

SMARP is my own little acronym for “Sallie Mae Accelerated Repayment Plan“. I did think for a while about coming up with a “T” word for the end so it would cleverly be “SMART” but, well, I dare to be different. :)

Before I get into starting the student loan accelerated repayment, I want to address my remaining debts a little bit. We have three main debts remaining (besides our mortgage). They are:

  • Spouse Student Loan: $11,537.66 @ 9% interest
  • My Student Loan: $11,636.71 @ 7% interest
  • Car Loan: $3136.69 @ 4% interest

Although I talk about the Debt Snowball , as defined by Dave Ramsey, in my debt repayment plans, I don’t follow the snowball strictly to the order he does it (lowest to highest balance). I am an interest order kind of gal, and I address my debts by which has the highest interest. So even though my car loan has the smallest balance, I won’t pay extra to the car loan at all before it gets paid off just by time passing (unless I get some kind of huge windfall). The credit cards had the highest interest (even though the credit card debt was at 0%, that was a temporary rate and would eventually reset to ~12%) so I attacked that debt first. Now that the credit card debt is paid off entirely (yay!) I am on to attacking my spouse’s student loan.

Phase 1: Establish a repayment method to reduce principal.

So on to SMARP. Phase one of accelerating the debt repayments to Sallie Mae is figuring out how to get Sallie Mae to apply extra payments to principal and not to advancing my next payment due date. I want to reduce my principal and therefore reduce the amount of interest I get charged, not just pay the total amount I would end up owing them after my entire loan term at a faster pace. I am not sure how they can get away with NOT reducing my principal when I send extra payments, but they can, and they do.

I have called Sallie Mae several times in the past to explore how to do this with online payments. Each time, I get a different answer, and each time, the answer is either irritating or incorrect. I have been told that the only way I can have my payment go to principal is to mail the payment and indicate such on the check (which I think is the actual answer), and I have also been told I can simply pay it online and it will automatically be applied to principal (NO – this does not work). In the FAQ on the Sallie Mae website, the only information about overpayments is they will advance your due date unless you indicate you want it applied to principal – but no explanation of how to actually do that through online payments. I have tried overpaying (by small amounts as an experiment) online, and it always gets applied to my next payment due, not reducing the principal amount.

Sallie Mae forced me into online payments by refusing to send me coupon books any longer once they found out my email address (I am happy to make online payments, but I was unhappy at being forced to do so), so I think it is pretty unfair of them to not provide some way of indicating with an online payment that the overpayment should go to principal. But they are the lender, and I am the borrower, and they own me until this process is complete, so… so be it. Today I started phase one by emailing their customer service department to determine definitively if there is any way of designating online overpayments to principal. Even if I am told there is, I will test it out with a small amount before I commit to a large overpayment, but for some reason I feel like an email might tell me more accurate information than a random phone person. I am probably wrong about that. I also asked for the address the overpayments need to be sent to if there is no online method for designating payments to principal and a list of EXACTLY what needs to be written on the check and included with the overpayment so that it goes to principal.

I know they’re not going to make it easy. I wish I could pay off the entire balance in one fell swoop. But that is probably not going to happen, so I’ll work within their system. I have faith I shall prevail. :)

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34 Responses to “Phase One of SMARP Activated”

  1. Please post an answer if you ever determine the correct way to pay down principal with Sallie Mae. I’d love to knock mine down at a faster rate, but I’m in the same boat you are!

  2. I would love to know what you find out – I have two student loans (at different interest rates), and I’ve tried to figure out how to get them to apply it to the one with the higher interest rate, and they won’t do it online. They told me I had to mail in my payment by check in order for them to do that, and even that, they wound up applying incorrectly.

  3. I have to call my loan company after each online payment and tell where they should apply it. I can’t just tell them I want it to go to the principal, that’d be too easy. I have to mention the specific group that it should be applied to.

    Of course, I’ll have to follow up a week later to make sure they earmarked it correctly.

  4. Hmmm, not sure why you’re having so many issues with your payments. I am currently in the midst of my own SMARP. I send extra any amount whenever I can via my online billpay linked to my checking account. It always covers the daily interest that has accrued first (currently $9.57 per day – gasp)and then hits the principle. Sometimes I only have enough to chip at the interest but eventually it snowflakes into the principal. The good thing is that by the time my automatic, standard monthly payment is applied most of that is able to go towards principal. That daily interest accrual is a nightmare! Worse than a credit card!

  5. One note. Although all my little extra payments have technically advanced the due date (as I see on their website), the automatic monthly payment still occurs. I believe I told them a few years ago to have that payment deduct regardless if I paid extra or not. I wouldn’t be concerned if the due date advances as you can still make payments. The way I see it – having the next due date 6 months in advance is a hedge so if I have a true, major financial emergency I have a buffer for the student loans. (Even so I am working on building up an emergency fund!)

  6. You might try using an online billpay that mails physical checks to billers and allows you to type things in the Memo field (like “apply to principal” or something). I use U.S. Bank like that, although I haven’t tried it with Sallie Mae. I did pay my car loan like that, though, despite the coupon books they sent me.

  7. I have enjoyed your blog for awhile now but this is my first comment.

    I have worked in the student loan/financial aid world for almost ten years now and you are right on with your complaints of Sallie Mae. Many other lenders practice these irritating things as well.

    I will be curious what you find out, and I also wanted to say that I am going to contact our SLMA marketing rep to see what HE has to say about making extra payments. It will most likely be a different answer than what you get, as that has been my experience.

  8. Yay for daring to be different.

    I’m slowly taking over the blogging world…

  9. Student loans are notorious for making it very difficult to apply additional payments to your principal. You may want to consider taking advantage of another credit card 0% balance transfer offer or a personal loan from a local bank or credit union to move the debt somewhere easier to deal with. Usually these options don’t make much sense for student loans, but your interest rates are pretty high.

  10. @Yvette – this is what I am afraid will happen:

    When we paid off my spouse’s car (years and years ago), we paid it off a little early. Not a huge amount early, but a few months. Well, because of how they applied the extra money to offset future payments vs to principal, we paid the *exact* same amount as if we had paid it off on time instead of early. No interest deduction whatsoever. Not one single penny.

    This is my “fear” of what happens when Sallie Mae applies my payments to offseting the next payment vs to principal. that I will end up paying the exact same amount I would if I waited out the 15 years, just faster. I want to save money on interest.

    I could be wrong. I would hope to be wrong. I am just trying to protect myself :)

  11. Please let me know how you do it. My student loan payments start in July and I want to have a system in place before then.

  12. I’m not sure why you’re having such trouble…my wife has A LOT of student loans through sallie mae. We’ve been paying $1000 every month so that we can have them paid off in three years. The minimum is something like $300 now…not really sure because its been quite a while since we paid the minimum.

    Every month, when we go to pay, after putting in $1000, it gives 2 options: 1) Prepaying interest(thus advancing your payments) or 2) Prepaying principal(extra goes directly to principal, does not advance payment)

    We always do the 2nd option, I think only once has it actually gone to option 1, because our due date is always one month after we actually pay (nice in case of an emergency).

    Maybe you have to more than double the minimum payment before it gives you this option? I don’t know, but I know this has always worked for us.

    Now if I could just get them to apply all the principal payment towards the loan with the highest interest rate, I’d be happy :-)

    Shoot me an email if you have a question I can help you with.

    By the way, I feel your pain with trying to talk to sallie mae on the phone. Their customer service is almost as bad as charter….I’ve just given up on calling sallie mae.

    Great site, I enjoy reading your postings.

  13. Hi, there. I have an experience that may help. First of all, have you requested a detailed statement showing all of your payments and a running total of the principle? This would be helpful. A few months ago, I had a similar frustration with our auto lender. I would send extra principle, and the next statement I got, it showed my next month’s payment being reduced by that amount. for example, if my regular payment was $200, and I paid $300 in November, then my next statement would arrive saying I owed $100. I got really angry about this, then I read the fine print on the back of the statement, and it said that you need to send them notice in writing of how you want the funds applied, or they will automatically put it towards the next payment. So the next time, I sent my extra $100 with a letter asking them to apply it to principle. No dice. My next statement still seemed to show that it had been credited to the next payment. I was really angry by now, and I called them on the phone to yell at them. The lady on the phone assured me that my payments were going to principle, but I argued with her, and complained that I didn’t like paying January’s interest in November. She sent me a statement such as I described above, and when it arrived, I was ready to go to war over the misuse of my extra payments.

    Well, it turned out they had applied my extra payments to principle, each and every time, even when I didn’t send anything in writing. There is something weird about the way they do statements, it does no seem to reflect what is really going on in your account. I think maybe the computer system that some of these places use to generate account statements does not actually communicate with the system that keeps track of accounts. All it knows is how whether you are up to date on payments, ahead, or behind.

    Regarding the car loan you paid off early–are you sure that you paid the same? How did you know? If you call for a payoff balance, the number they give you reflects what it would cost if you sent the payment right that very instant, not the total principle and interest for the entire term of the loan. You may indeed have saved yourselves a couple of months of interest. (And it would have been a small amount, since you were close to the end of the loan.)

    Good luck!

  14. @ Dave – it never gives me that option. Of course, I have only made small overpayments in the past, never something like twice the minimum. It never asks me anything, it just does what it does. Maybe that’s the answer. Hmm.

    @ Catherine – as for the car – yeah, we paid the entire loan + interest amount, I know because I didn’t call for a payoff balance, I just paid the entire end of the loan (coupons) at once. What can I say, I was younger and stupider back then. This was 5-6 years ago. lol. I had no idea what I was doing :)

    Online there is a detailed statement showing my payments and principal – it has been a long time since I have overpaid (about a year) so I’d have to go back and see if I could figure it out. But it is something to look at in the future, once I start overpaying.

    Still have some emergency fund to accrue, then I may do an overpayment experiment. Maybe in April :)

  15. @Emily – you did say that this weekend, didn’t you? You’ve certainly taken over my subconscious then :) I didn’t realize it until you pointed it out.

  16. Wow… seeing your interest rates makes me so glad that I consolidated my loans when I did.. I managed to lock in 3.25% for 24k in 2002.

    Anyways, I have been trying to pay of my car loan (at 6%) first and have the same trouble. On my bill, there is even a nice little spot to indicate “additional principal”. I do so, write it all over my check, and STILL they apply it to next month’s. I end up calling customer service pretty much every single month to get it fixed. Online bill payment won’t work at all for anything above my minimum. They really want their interest!

  17. I’ve got a Sallie Mae loan. At first, I paid by check using the stubs, but I’ve been paying online exclusively for several years now. I’ve never had a problem applying extra payments to the principal without skipping a monthly payment.

    Here’s how I do it, in case it helps: I have automatic deductions set up for my account. Whenever I want to make an extra payment online, I choose “make a payment” and the website asks me whether I want to apply the payment towards my next month’s balance, or to pay down the principal. The site somehow just “knows” to ask me this before processing my payment – maybe it’s because I have the automatic plan? I assumed it would work the same for everyone, but maybe it doesn’t. Anyway, I choose the latter, the site warns me that I’ll be charged my full payment next month as usual, and the transaction is completed. When I check my payment history, I can see exactly how much of the extra payments go towards the principal.

    When you tried overpaying online, did you just increase your regular payment amount, or did you make 2 separate payments for that month? Maybe the extra amount has to be made as a separate payment for the website to offer to apply it to the principal? (I never add $$ to my regular monthly payment, I always make an additional payment for that month if I want to pay extra). I was really surprised to see you were having this problem with Sallie Mae, because it is indeed possible to pay down the principal this way!

  18. One other idea for you….do you have multiple loans that are consolidated? Or just one? Or loans that you pay for separately? Our loans are consolidated, so we just make one payment and it automatically dispereses the payments between them.

    That’s the only thing that I can think might be different between our accounts. Or, it could also be that the loans I’m talking about are private loans, not federal.

  19. Very awesome. I wondered which would be next in your snowball.

    I’m not sure how the coupon books work…but could you pay the normal payment online every month and then mail them a check payment to be applied towards principal?

    Ramsey’s system works for those who need motivation and aren’t numbers geeks who relish things like interest differences. a) You’re a numbers geek. Amdmit it ;) and b) you’re darn well motivated with your snowflaking and all.

  20. @ Sara – yes, we are old, we consolidated our loans long ago. before the huge downturn in interest rates. ah well.

    @ mrs Micah – yes I am a numbers geek! lol. I admit that :)

    @ Vinessa – I have tried making a separate payment, and it automatically tells me it is to the next month payment amount. Maybe if I was a month ahead… But. This was over a year ago now. things may have changed. who knows. I’m just overly paranoid. :)

    @ Dave – my loans and my spouse’s loans are both federal subsidized ones. Maybe it is different? I have… no clue. :)

  21. I always wondered the same thing because I always paid extra, and my amount due was 0.00, and my next payment due was always far, far into the future. Because my loans weren’t that excessive, I just kept paying and paying until I was able to pay the whole thing off, but they never put my extra payments towards the principal. I feel your pain.

    I’m also guessing that the computer sets up the option if you pay through their site. I always paid my bills through my bank, so my bank obviously didn’t give me option 1 or 2. I do know that my bank has the memo area, so maybe if I had written principal payment it would’ve worked. I’m happy to say ‘bygones’ now. :) I’ve actually paid for my degree, and I’m pretty syched about it. Now, I’m irritated that they never sent me a statement saying ‘You’ve paid in full;stop logging in to check your 0 balance.’ ha!

  22. I think lenders are actively trying to discourage people from paying toward principal. Obviously, the sooner you pay off a loan, the less profit they extract from you.

    When I made my first payment toward the principal of a small 2nd mortgage, my credit union tried to tell me it could NOT be applied toward principal; that their rules said they had to apply it to interest. Only after I made quite a scene and threatened to complain to the banking commission did they back down. Turns out there’s a code — “LOPC — that you can put on a check that the teller can use to force payment to principal. Noooo chance an extra online payment will be applied to principal: I have to physically go in to the credit union, reiterate my request that the money go to principal, get a receipt, and check it carefully before leaving.

    About 10 years ago, I bought a car with a loan through the same credit union. I paid the five-year loan in 18 months by throwing every extra penny at the principal, and no objection was ever made. That’s why I think the insistence on applying extra payments toward interest or toward “next month’s payment” (sheesh!) is a new development.

  23. I looked into how my school loan lender (nelnet) applies extra payments. They, too, start with the interest. But somehow it’s different with school loans than with any other type of loan – maybe someone has already explained it in the comments above. But basically, since the interest accrues daily, by paying down the interest, in the long run it all works out by lowering the principal as well. You can tell I’m very numbers-oriented. ;) Also, I called nelnet and found out how to change my settings online, to where my due date remains the same (instead of pushing it back another month, as you say). It was very easy. But I only did this because my payments are automatically taken from my bank account – if I hand-wrote a check every month, it wouldn’t matter what the due date says. You can still make monthly payments, and it’s all the same.

  24. I’ve done a quick look on Sallie Mae’s site, and found this page:
    http://www.salliemae.com/after_graduation/manage_your_loans/repaying-student-loans/prepaying/prepaying.htm

    I think the key is this sentence here: “Any extra payments you make are applied to the principal of the loan, after the accrued interest and any outstanding fees (if applicable) are satisfied.”

    The small amount you were paying extra probably didn’t cover the interest and/or fees that had already accrued for that month. For example, if you pay $100/month in interest, in a 31 day month, that would be around $3.23/day in interest. If your statement period was from 1Jan-1Feb, and you paid your bill on 7 Feb, you’d already have accrued around $22 in interest for that month. If the amount you snowflaked wasn’t over that, then it did just take care of the interest that had been accrued in that period.

    I’m not saying I agree w/it, but that might be what is going on.

  25. Thanks for all the info, perspectives, and help!

    I haven’t heard back from my email yet except an automated response that they received it. I will post about what I learn when I do :)

    It could be that i wasn’t overpaying enough to trigger asking me where I want the extra money to go. this was back in my less systematic/organized days where I just randomly threw extra money at things without much purpose. Here student loan, have an extra $5. That might make a difference somewhere, right? Heh. Depending on what Sallie Mae says, I may have to do further overpayment experiments.

    Ah, if I just had the magic payoff number sitting around in my bank account… lol

  26. For those who are trying to prepay the high interest loans first, have you tried setting up multiple billing groups on the website? I only have one loan so I haven’t really explored that feature but it seems like what you need.

  27. I have two loans with Sallie Mae, and they are atrocious on customer service. I have had the same problem with trying to make extra payments. The only way they would process them properly for me was to send a check in the mail, with a letter specifying to pay down principal.

    So I gave up and let them win- after I consolidated in 2002. Several years later, I am making my standard payments and now have a rate of 2.125% because I am on auto-draft and made 48 consecutive on-time payments. One of the two loans has subsidized interest as well. Compared to my 6.875% mortgage, the Sallie Mae loans are practically free money. If and when I have paydown money, I hit the mortgage. Wachovia knows how to handle this, and does it effortlessly.

    Still, Sallie Mae continues to send me all sorts of material on how to lower my monthly payments. (and extend my debt forever, funny they never mention that part)

  28. I know a number of people who have had similar problems with Sally Mae, blissfully, my loans are held by a different agency.

    However, one solution I have seen used is a little convoluted, but saves you money in the long run. Instead of sending the extra to Sally Mae, put any extra you might have into a high interest savings account. Keep it up until the amount you have in that savings account = the payoff amount. You save in the long run in two ways, 1 you can payoff the entire loan sooner (saving you say, a few years at 9%) and you have made some money on that money in the meantime (Right now ING is 3.5% I think) which is sort of equivalent to paying only 5.5% on the 9% loan.

    Again, kinda convoluted, but far less hassle in the long run. (Especially if you have to double check the application of every payment every time)

  29. Kind of echoing what Yvette said, but here goes.
    Last summer, we paid down a chunk of my husband’s student loan with SM. We used our ING checking account and in the memo line designated that it was for principle. Anyway, it did do funny things to our due date, but they still take out the monthly payment each month, and no month was missed. My husband called to get an explanation of why our due date was months ahead now, but the explanation made no sense. Checking the breakdown of payments page, they did do what they were supposed to with that money.

  30. I’m confused – where would an overpayment go BUT to Principal?

  31. @Investing911 – accrued interest, a black hole… I’m not sure but it seems there is somewhere else for it to go. Not wanting my money in the black hole of pushed ahead payments…

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