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R. Klein, EA, Accountant
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I messed up when I consolidated my student loans and managed

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I messed up when I consolidated my student loans and managed to consolidate less than the payoff. I've continued making payments on the unconsolidated loans, and at this point my next due date on a payment is in 2017. It looks as though I have the option of changing the due date. When I select that on my servicer's website I get the following message:

 

"Some, or all, of your loans have been prepaid. A prepaid loan means your next payment due date has been advanced by the number of full monthly payments that are satisfied by the excess payment received. If you decide to remove or change your prepaid status, the due date for your next payment will be adjusted to the date you select. Since interest cannot be satisfied in advance, changing your prepaid status will not affect your outstanding balance or the amount of interest already accrued. However, your account may become due for the current month. Please remember, you will receive a bill for your next payment due date (whichever date you select). Since interest cannot be satisfied prior to it accruing, if you decide NOT to remove your prepaid status, interest will continue to accrue on your account while it is in the prepaid status. This will then be satisfied first when applying your next payment."

 

I don't fully understand what that means. Also, I can't figure out whether it makes sense to change the due date. How would changing the due date impact my student loan payments? I make a point of paying more than the accrued interest each month. The servicer claims my monthly payments would be about 400 starting in 2017, but I currently pay between 200-250 each month. Approximately 25-50% is applied to principal, depending on the month.

Submitted: 3 years ago.
Category: Finance
Expert:  Rachel-Mod replied 3 years ago.

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Customer: replied 3 years ago.
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Expert:  R. Klein, EA replied 3 years ago.
This message indicates that when you "re-financed" part of your loan rather than all of it, the loan is still open. Let's say that you owed $20K and you borrowed $15K to pay it down. Under the federal rules, your money (the $15K) goes to pay all of your monthly minimum payments. This is true even if you paid the full $20K. Under the crazy federal rules, the banks earn their FULL interest as though the loan is paid monthly, unlike a mortgage, for example. If you do prepay a loan IN FULL, THEN you can request a refund of the interest not actually earned by the lender. In your case, since the original loan(s) is not retired (paid-off), it's like you pre-paid for several months rather than making a payment to lower the principal.

If you make payments on the remainder of the balance, let's say tomorrow you paid the remaining $5K, then that $5K goes toward the monthly payments from 2017 and into the future.

Again, unlike a mortgage, such that when you pay early you don't have to pay the interest, with a student loan, you actually have to pay all the interest AND principal due for the remainder of the term and then you can request a refund of the interest not actually earned because you paid off the loan early.
Customer: replied 3 years ago.
Thank you. So my actions didn't push back th final payment on the loan and any payments I make now are applied to the next payment due. Right? But if I were to pay the "payoff" amount tomorrow I could request a refund of the monies I've paid that the lender applied to interest but didn't actually earn as a result of me payng my loan off earli. Is that right? If so, what would it mean to "change the prepaid status" and adjust the due date for my next payment?
Expert:  R. Klein, EA replied 3 years ago.
Right. So, if you made no payments on the old loan for several years (representing the payments that were made with the refinance), nothing would happen at all on the old loan. You could either make payments now to retire the loan and request a refund of the unearned interest OR you could make no payments on this old loan until 2017 and then keep pick up paying the monthly payments where you "left off", but you would get no refund of the interest. This second option would not make much sense since you would not save anything (and would be paying interest on both the new AND the old loans).
R. Klein, EA, Accountant
Category: Finance
Satisfied Customers: 3374
Experience: TurboTax Expert. QuickBooks Certified Pro Advisor
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