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Are loans normally structured this way?
Old 02-15-2010, 10:34 PM   #1
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Are loans normally structured this way?

Maybe a basic question here, but I've never looked closely at this before. I'm doing my taxes, and I noticed that the amount of student loan interest I paid was still above the max deductible. I'm trying to figure out how much extra I need to pay on the principal to get the interest below the max deductible. So I look at the payment details for the student loan, and I see this:

Date Interest Principal
12/2009 $213.91 $148.09
11/2009 $198.76 $163.24
10/2009 $255.02 $106.98
09/2009 $223.82 $138.18
08/2009 $280.28 $81.72
07/2009 $224.89 $137.11
06/2009 $225.56 $136.44
05/2009 $282.43 $79.57
04/2009 $250.75 $111.25
03/2009 $227.15 $134.85
02/2009 $235.90 $126.10
01/2009 $309.45 $52.55

I pay the same amount every month, so I was surprised to see the applied amounts change so drastically each month. I've never really looked on a month-to-month basis to see how the interest/principal is distributed, but I always assumed a nice gradual decline in interest (with a corresponding rise in principal). Is this distribution typical? Also, given this distribution, how can I figure out how much extra principal to pay each month to get the max interest below $2500? The loan rate is 6.375%.

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Old 02-16-2010, 12:04 AM   #2
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Without knowing much anything about US student loans:

1. over time the interest component will fall as more and more principal is paid off

2. there will be small differences in the interest component from month to month due to differing numbers of days in the month

3. if the interest rate is a short term floating rate then larger fluctuations in the interest component each month are to be expected

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Old 02-16-2010, 06:39 AM   #3
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That's the weirdest interest stream I've ever seen. It looks like a highly variable interest rate. Normal fixed loans are highly predictable and smooth, as you expect. Even my short-term variable rate HELOC currently jumps between a couple of different interest-only payments, depending on the number of days in the month. Short-term rates (the prime rate in my case) have not varied on the HELOC for a couple of years or so.
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Old 02-16-2010, 06:52 AM   #4
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Look at the note, run your own amortization schedule based on the terms, and then decide whether you may be getting screwed.

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Old 02-16-2010, 07:14 AM   #5
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Looks like a standard simple interest note. You pay the interest for the days outstanding for the month.

If you take your principal amount for the month (balance after applying latest payment) x the interest rate divided by 365 (or 360) you will get the daily interest. Then figure out how many days between when your last payment and current payment post and multiply by the daily interest. Subtract this from the payment amount and you will get the pricipal paid for the month and the starting point for the next calculation.

It is more like a credit card than a mortgage. If you pay early you will pay less interest, if you pay late you will pay more. For a mortgage loan you will pay the same whether you pay on the 1st or the 15th. In this case the fixed payment is approximate and you will normally end up with a payment or so difference on either side of the term to account for the fluctuations of when you pay over the term.

If you can't make the math work by using the daily interest then you could have a problem. Sometimes there are also mysterious delays in posting your payment which earns the bank a little more interest. I would try to pay electronically so you know the draft date.

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Old 02-16-2010, 09:47 AM   #6
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I have one of these student loans as well. Daily interest is how it is calculated. Mine looks a little smoother than yours but I have electronic draft which helps guarantee accurate deposit days.
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Old 02-16-2010, 10:17 AM   #7
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If your rate is fixed at 6.375% then a ballpark number for the principal is $39,215. That's a full years worth of interest of $2500. Amortizing monthly payments rather than a full year at $39,215 will make it less than $2500 but that's probably close enough for what you are trying to do.


Hope that helps.

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