By Joseph Reinke, CFA
This article is for those implementing your student loan repayment strategy and have Great Lakes as your student loan servicer. You’ll definitely want to read this article….
- Great Lakes Student Loans - The Good News
- 2 Key Elements In Making Prepayments
- Prepayment Allocation
- Detailed Example
Great Lakes Student Loans – The Good News
“I called Great Lakes again and they are supposed to be reapplying the payments, again. The last person I talked to said the person I spoke with last week entered everything “right”, yet the payments were still not applied correctly.”
We hear this daily from FitBUX Members….so, what could be good about having Great Lakes if they mess up payments?
Loan services make mistakes. However, based on our experience, Great Lakes’ customer service is hands down the best in the student loan industry.
2 Key Elements In Making Prepayments
Let's take a step back. When you are make prepayments to save money and pay off your student loans faster, there are 2 key elements to make sure you are doing so in an optimal fashion:
First, how your prepayments are allocated. The different student loan servicers sometimes get this wrong. If they do, it will cost you thousands of dollars over the life of your loans.
First things first, we need to define two terms: Required monthly payment vs. discretionary prepayments
- Your total required monthly payment is the payment you have to make each month. That required payment is split into two parts: an interest amount and a principal amount. The interest amount covers how much you owe in interest each month. The principal amount is applied to your loan principal and reduces your overall balance. (Click here for a video on How A Loan Works).
You can’t choose how the required payment is allocated across your different loans, i.e. you can't apply your required monthly payment to your highest-interest loan first.
- A prepayment is an amount you elect to pay above your required monthly payment. The point of the prepayment is to reduce how much you owe at a faster pace. Therefore, you pay less interest in the long-run.
I am going to show you how Great Lakes applies payments using an example. As a heads up, you may have to reread this a few times because of the math. You will want to pull out a piece of paper and draw out a time line….
- You have multiple loans all at different interest rates.
- Your total required monthly payment is $1,100.
- Of the $1,100 monthly payment, $900 is applied to reduce principal while $200 will be used to pay interest. This $900 number is the one you want to remember.
- Great Lakes has a “billing cycle.” This billing cycle ends the day your required payment is due and starts over the next day. For this example, let’s assume that the billing cycle ends the 30th of each month.
- You pay your required monthly payment on the 30th of each month, using the auto-pay feature Great Lakes offers.
- Your next payment is March 30th.
- You decide you want to make a prepayment of $300 on March 20th and you want to apply it to your highest interest rate loan first, as this will save you the most money.
According to Great Lakes, they “have to apply your payment first to satisfy your required payment for the given billing cycle. Then any amount above that goes to reduce to the loan of your choice.”
What this means for your prepayment: Since that $300 prepayment is made on March 20th, it will be considered as a portion of your required monthly payment for the billing cycle ending on March 30th.
In other words, what you thought was a prepayment on March 20th, will NOT be applied against the highest-interest loan first.
What this means for your required monthly payment: Your $1,100 required monthly auto-payment will still be made on March 30th.
Since the $300 payment you made on March 20th was considered part of your required payment for the billing cycle ending on March 30th, Only $600 of your auto-payment is used to satisfy the rest of the principal portion of your required payment ($900 less the $300 you already paid).
In essence, the remaining $300 of your required monthly auto-pay will be treated as a prepayment against your loans’ principals but only on March 30th.
This cost you money. Of course, making your prepayment after the end of your March billing cycle won’t help either since that payment would be applied to your required payment for your April billing cycle…
Time is money, but this money is going into their pocket, not yours.
It gets worse...
By default, loan services do not always allocate the portion of a payment made by auto-pay to a specific loan. So the $300 “left over” from your previous required payment you thought you could apply to your highest-interest loan is not happening.
In summary: by default, your prepayments are applied later than you’d like AND they are not always applied the way you want them to be. With Great Lakes, you have to make sure your excess payment preference is set up to allocate your extra payment correctly…and sometimes that still doesn’t work.
Great Lakes has told us to have FitBUX Members make their prepayment targeting a single loan on the same day as their required auto-payment but as a separate payment.
But there is one more scenario that keeps things “interesting”. If your auto-payment happens to fall on the weekend or holiday you won’t be able to make your prepayment the same day as your scheduled auto-pay.
In that case, you will want to make your prepayment the last business day before your auto-pay is scheduled and then call Great Lakes the first business day after your auto-pay was made to have them apply your prepayment correctly.
Also, Great Lakes has a relatively new technology that allows you to specify how any prepayments should be applied and we highly recommend you set this up in advance. This is the aforementioned excess payment election.
The FitBUX Student Loan Tracking Solution
As you can see, this is a topic that can get really messy, really quickly. In addition, when one of your loans is paid off, you will have to go through all of this again because Great Lakes doesn’t drop your auto-payment. Therefore, you’ll be allocating your prepayment incorrectly (I’m not going into details on this article about this because it can get really confusing).
Note: The following is a shameless plug:
Our FitBUX Tracking Solution customizes your student loan repayment strategy, keeps track of your progress and flags errors should Great Lakes make one. In addition, our FitBUX Coaches will call Great Lakes with you to correct the mistake if one is made.