I am scheduled to start paying my SL's in September 2008, and I'm a bit confused on the payment amount, so I just wanted to see if this made any sense...?

I have a substantial amount of debt - not looking for feedback on that as I intend to pay off every dime.

Anyway, I owe 172,000 and it is separated into two loans at 4.25% - one for $127K and the other $42K roughly. I selected graduated payments so that I had a buffer, but intend to pay more on the principal in order to pay them off before I retire, lol. They have my payments as $350 for the first loan, and $127 for the second - but by my calculations, that falls short of even paying off the interest by $180!!

Is this how graduated payments work? Will they eventually go over the interest by enough to pay the loan+ interest off over time?

I'm more just curious as I plan to pay interest + principal regardless - thanks!


Susan

Hi Suze,

I read through your numbers and whipped out an excel spreadsheet and ran them myself. Your conclusions are correct. You'd have to pay $450 on the big loan and $149 a month for the small loan to keep up with the interest per year. What will happen is they will add any unpaid interest to your principal. But this is what would happen if you didn't pay anything all year, and started with the 4.25% interest added directly on to your loan.

However, I think doing it that way we're both mistaken.
Don't they calculate interest quarterly then add it to your principal? So by paying $1400 for four months on the big one, you've paid some principal before you pay some interest. So you're lowering your principal, so by the end of the year you'll have less interest to pay on the loan.. because the 4.25 % won't be on the principal you started the year with.. it'd be on the leftovers. I don't know how that breaks down in numbers, but I think they are suppose to make sure your loan is going down.

It is, however, to their advantage to let you do it as slowly as possible. They are making money with interest by extending the life of your loan. So if you can throw your economic stimulus check, or a credit card rebate at your loans now and then, do it.


By the way, my loan payments before I went grad school were around $600/mth. I dumped all of my extra money at the small one first just to feel good at having one less. I had 4 seperate loans. You'd have to crunch the numbers to see if that is the most sound way to go.. but mentally it was great for me when I looked at that one gone and set my focus on the last remaining incredible hulk.

Thanks climbingup - I thought it was just so strange. I hadn't heard about the quarterly interest, I just figured it was like a mortgage (might as well be, lol). They may also increase my minimum before I start paying...

I hadn't thought about attacking one first actually. I'm not sure how I'll be billed - as two payments, or one. It is daunting that's for sure! But I plan on taking one payment at a time, and always pay SOMETHING on the principal, and try not to think about paying these off at 70 years old. I figure at such a good interest rate, they will be the last thing I attack after mortage .