By Joseph Reinke, CFA, CEO of FitBUX
In the student loan workshops we do for university programs across the country, we start by detailing how much you, as a student, will defer in interest on your student loans while in school.
In this article, we detail how a student tried to save money by making payments while in school but the money wasn’t applied correctly (this could have been the fault of the student or the loan servicer which was Navient in this case). You’ll also learn what you need to do to maximize your savings in the future.
What You Need To Know
For this article there are two key items you need to know about student loans:
- 120 Day Refund Policy: As a student, if you make a payment on your student loans within 120 days of it being disbursed you can classify it as a refund. This means you do not have to pay origination fees or accrued interest on that amount of money for the time you had borrowed the money.
- Origination fees: Every time you borrow Federal money for student loans you pay a fee. On Grad Plus Loans this fee is 4.276%. For more information on this fee please see the following video:
One of our FitBUX Members named Ryan (for client privacy concerns, the actual name and dollar amounts have been changed), borrowed a sum of money to pay for tuition. The loan was a Grad Plus loan with an interest rate of 7%.
Five days later, Ryan wanted to repay $2,000 of the loan so he made a payment.
In addition, Ryan had 2.5 years to go before graduation and the start of repayment.
What Should Have Happened
Ryan’s payment should have been classified as a refund. If the payment had been classified this way, he would have saved money on the origination fee that was charged. More importantly, that is two thousand dollars that wouldn’t have accrued interest while he was in school as well as money money he would not have to have paid back over ten years once he entered repayment.
Had this payment been made correctly he would have saved $1,295.
What Actually Happened
Instead of classifying the payment as a refund, Navient applied the money to repay the accrued interest from his undergrad loans that were being charged a 4.25% interest rate. This still saves Ryan money but the amount saved is only $458.
Instead of saving $1,295, Ryan only saved $458. In short, this error cost him $837. To make matters worse, Ryan made payments this way 4 times before he graduated so the total cost was about $3,300.
This is one simple item that could’ve been corrected to save money. These small things add up over time and can be captured simply by having an understanding and a plan.