Payment 1 - Required minimum monthly payment Payment 2 - An additional principal only payment targeted at a specific loan group
You can see my payment 1 for January 2019 here. It was for $862.56 across 4 loan groups, with approximatley 25% allocated towards interest, ouch!
My 2nd payment is $1,139.44 which, in aggregate for the month of January, represents $2002, my self-imposed minimum monthly payment.
How does my 2nd payment get distributed?
Unlike payment 1, which requires that I make the minimum monthly payment across loan groups B
It’s fair to ask “doesn’t it make more sense to pay off the highest interest rate first?” My response to that is:
if you and I cared about interest rate and the underlying math, we wouldn’t be sitting here with $170,000 of student loan debt!
In all seriousness, personal finance is 20% math and 80% personal and the feeling of being able to say “I’ve paid off 3 of my 9 loan groups” gives me the momentum and energy to keep moving. Furthermore, my target
Let’s take a look at payment #2. Following the debt snowball method above, a total of $1,139.44 was applied to loan group B with an outstanding balance of $17,298.74. $1,127.49 went to principal and only $11.95 went to interest.
When we determine how much of this additional payment is applied to interest vs principal, it’s important to understand that all payments will have a percentage applied to interest. A principal only payment reduces the principal but not the interest. Remember interest is calculated on principal. The good news is that I already made the required minimum payment to loan group B in my 1st January 2019 payment. This is important because loan group B has an interest rate of 6.31% with an outstanding principal of $17,289.84, which means it accrues about $2.99 a day in interest as outlined below.
I only pay the interest that accrues between my last payment and today’s payment. Since my last payment was made on 1/6/19, and today is only 1/10/19, I only pay ($2.99 x 4 days) or $11.95 of interest in this 2nd payment! hooray!
Did my overall balance actually go down?
When I look at my loan pay off balance as of 1/10/19, i’m excited to see that the balance dropped below $163,000 to only $162,894.96. You can see the impact of the $1,139.44 additional payment in column ‘B’ below. The total balance for loan group B dropped by $1128!
What really kicks me in the teeth though, is that while loan group B went down by over $1,000 as a result of this payment, all other loan groups (D
As of 1/10/19, my pay off balance is $162,894.96. My loan balance accrues interest at a rate of $27 a day, which is $837 a month. Making my minimum monthly payments of $1600, over 50% of the payment will