Student loan servicers often ask borrowers if they want to apply an overpayment towards the account balance, or to use the overpayment to advance payment due date. The servicer’s explanation can be confusing for first-time borrowers with no experience making overpayments. Which option is the smartest financial decision?
Extra payments over and above your minimum monthly repayment can be very beneficial if you have extra cash on hand. But, advancing payment due dates might not be the best decision. Yes, it may be helpful not to have to make a few months of student loan repayments, but that’s where the benefit ends. It’s not helpful to your long-term finances.
Why You Shouldn’t Advance Your Due Date
If financially feasible, definitely start making overpayments on your student loans. The more money you can put down on the debt today, the faster you can pay the student loans off. That’s because you’ll accrue less interest. The magic of compounding interest will work in your favor by saving you that money. Unfortunately, making overpayments is not always a straightforward process. Student loan services typically offer two options for this ‘extra’ money:
- Apply Overpayment Toward Account Balance
- Apply Overpayment To Advance Payment Due Date
In the first option, any extra money the servicer receives from you over and above the minimum monthly payment will first be applied to any late fees. Next, it will be applied to accrued interest (up until the payment date), and finally, the remainder goes toward the principal. The key in this scenario is to ensure extra money helps reduce the total of your principal.
The second option, and the one that many borrowers choose, is to advance the payment due date for future payments. In this option, your overpayment goes towards paying off the future monthly minimums. Explained another way, you advance future monthly payments by as much as the extra amount you are paying. So if you’re making $100 monthly payments and you pay an extra $200 for a total of a $300 payment, you would not make a payment for the next two months. Your extra payment would have covered the upcoming amounts due.
While it might be tempting to stop making monthly payments because of an unexpected financial windfall, this option does nothing to actually reduce what you owe. Interest still accumulates during the months of advanced payments.
Advancing your due date by one month or more doesn’t shorten the term of the loan, nor does it reduce the total you owe. It merely makes minimum payments in advance. So it does little to benefit you, the borrower. If you do have extra cash lying around, and you plan to make an overpayment on your student loan, always choose to put it toward your principal because that really does save you money in the future.
Other Concerns With Advancing Your Due Date on Student Loans
According to a Consumer Financial Protection Bureau (CFPB) report, 65 percent of the complaints about federal student loans were about mishandled payments in 2017. In the private student loan realm, 35 percent of complaints were about mishandled payments.
If you want to make an overpayment on your upcoming student loan bill, it’s important to indicate how you wish this payment to be made directly to your student loan servicer. Servicers are generally focused on making money. In the past, the federal government has reprimanded some servicers for their inappropriate handling of overpayments.
Borrowers should indicate in writing which loans they would like the overpayment to go toward and in what sequence to avoid the servicer making incorrect assumptions. Mishandled overpayments have become such an issue that the CFPB drafted a sample letter for borrowers to submit with an overpayment. With clear directions, borrowers can be sure that servicers handle their payments as directed – which ideally would allot excess funds toward the principal.
Author: Jeff Gitlen
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