This article is by staff writer Honey Smith.

When I paid off my small student loan in August, I placed my payoff focus on the “small” sub-account of my consolidated loan. “Small” is meant to be in sarcastic quotation marks, of course, because the balance at that time was just over $35,000. Hardly small!

I mentioned in my August progress report that I wanted to focus on saving for awhile, and I have been doing that. However, I couldn’t just sit by and make the minimum payment on my student loan. Since I was on an interest-only payment plan, I wasn’t making any progress. Some months my balance went up instead of down!

Aligning my goal with the Balanced Money Formula

I wanted to make more of a dent so that I would meet my goal of paying off $5,000 in student loan principal in 2013. I started by busting out my original calculations based on my review of “All Your Worth” by Elizabeth Warren and Amelia Warren Tyagi. As a reminder, the Balanced Money Formula used in that book advocates spending 50 percent on Needs, 30 percent on Wants, and 20 percent on Savings:

At the time of my review, I was spending 63 percent of my income on Must-Haves, 9 percent of my income on Savings, and 28 percent of my income on Wants. I determined that in order to bring my savings in line with BMF, I needed to allocate an additional $300 per month toward debt repayment (my student loans).

Since getting a raise in July as well as paying off one debt entirely and becoming vested in my retirement contributions in August, my numbers have changed. These days, assuming no extra payments on my loans, it looks more like this:

  • 54 percent Needs
  • 16 percent Savings
  • 30 percent Wants

While according to BMF that’s the Mary Poppins of monthly expenses, as I mentioned I decided that one of my Wants is to pay off my student loans. Preferably before I retire! If I kept making an extra $300 payment to my loans every month, my breakout looks like this:

  • 54 percent Needs
  • 27 percent Savings
  • 19 percent Wants

I was also afraid that spending any of the money I had been putting toward my now paid-off loan would put me at risk of falling prey to the hedonic treadmill. Instead, I decided to start sending that $300 to my large student loan right away. This deliberate lowering of the bar for happiness is also (partly) why I adjusted my federal withholding so that my take-home pay stayed the same after my raise.

How my extra payment was allocated by my servicer

Remember, my payment plan is graduated and interest-only at the moment. Of my $353.80 regular monthly payment, $132.50 was allocated toward the smaller balance. When I logged in and allocated my $300 to the small balance I was excited to pay off some principal.

Of that extra payment, $82.37 was allocated to interest and $217.63 to principal. However, when my regular monthly auto-debit went through a couple of weeks later, the entire $353.80 was allocated to my LARGE balance! In addition, my servicer used the extra payment amounts — on BOTH accounts — to advance my due date.

This was frustrating for a couple of reasons. The first was that I was assuming that the regular monthly payment would still be broken up between the two loans the same as always. In other words, I’d be making $432.50 in payments toward the smaller loan each month — the debt snowball method. Instead, I ended up essentially making extra payments to both balances.

The second reason I was frustrated is that when you advance your due date like that, you are not paying down your principal as fast as you could be. You are buying yourself flexibility by doing it that way. If money is tight and your due date is advanced, you can skip a payment that month. But I’d prefer to pay off my principal faster.

How I changed things up in September

I spent the first half of September trying to decide whether it was worth it to un-enroll from auto-debit and suffer the interest rate increase. At least then I could allocate my payments the way that I wanted to. Fortunately, when I logged into my account mid-month to make my extra payment, I noticed something. There was a box I could check to indicate that the extra payment should not be used to advance my due date!

Was that box always there and I just never noticed it? Possibly, but unlikely given how often I log into my student loan account and glare at the numbers. Was the box added just this month because my servicer realized how silly they were for not providing this option online? Especially when it was easily available if you sent payments by check and included the downloadable “apply this to principal” form?

Well, when you put it that way, it sounds unlikely, too. Hmm. In any case, I allocated my extra payment the way I wanted and clicked submit. However, when the September regular monthly payment processed, I realized to my dismay that once again the entire payment had been allocated to my large balance and my due date had once again been advanced. Sigh.

Where do I go from here?

I am not sure of all the details impacted by the August extra payment versus the September extra payment. Unfortunately, I didn’t start tracking some of the screens until the end of September. So I definitely have more data to collect going forward.

At this point the outstanding balance on my small loan is $34,870.41 and the due date has been advanced to 1/28/2014. The balance on the large loan is $58,535.83 and the due date has been advanced to 12/28/2013. That brings the total balance to $93,406.24, which is a decrease of $1,176.61 since the beginning of the year.

Regardless of my frustrations with my student loan servicer, there is good news to be found. Combined with the small unconsolidated balance I paid off in July, that means I’ve paid off a total of $4,424.34 in student loan debt this year. With three months of making two payments per month left to go, I expect to exceed my goal of $5,000 in student loan payoff. By how much? We’ll have to wait and see!

Would you choose (or have you chosen) to advance the due date on your student loan? Any experience or advice you have to share as I continue my payoff journey?

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