This post is by staff writer Honey Smith.

In my last progress report, I mentioned that I took my student loans off Kwik-pay (autodebit) until after closing on my house. The thinking was that I’d have the money just in case things didn’t go smoothly with the house and move. Originally, I thought I’d re-enable the automatic payments after closing.

Then I realized that if I kept my student loans on manual payments, I wouldn’t be at the mercy of my lender in terms of how payments were allocated. I assumed that I was no longer receiving an interest rate reduction for being on Kwik-pay. Nothing about an interest rate reduction was listed anywhere that I could see in their account interface.

However, it turns out that I was getting an interest rate reduction. Although I didn’t receive any sort of notification, after removing Kwik-pay from my account, I noticed the next time I logged in that the interest rate was now listed at 4.75 percent. Previously, it was 4.5 percent.

Argh. So now I am faced with a choice. Should I pay a slightly higher interest rate for the privilege of being able to allocate every payment exactly how I want to? Or should I re-enable Kwik-pay and get the interest rate reduction?

In favor of flexible payment allocation

My current minimum monthly payment is $390.95. Of that, $244.54 is supposed to go to the larger balance of $57,499.51. The rest of the payment, $146.41, is supposed to go to the smaller balance of $33,077.20. I can use the online interface to direct extra payments however I want; I had been allocating them to the smaller balance.

However, if I was paid ahead on the smaller account, then my lender would automatically direct the entire minimum monthly payment to the large balance. On the one hand, this isn’t a bad thing. I am not going to pay off my student loans in a year, but I was paying ahead on both accounts.

On the other hand, the entire reason I was making the extra payments was to pay off the smaller balance as quickly as possible. That way there would only be one account left, which would provide a psychological boost and some motivation on the road to debt freedom. Also, if I fell upon tough times, then having fewer monthly payments would increase my financial flexibility.

In May, for example, I made over $800 in payments to the smaller balance and $300 in payments to the larger balance. That included paying my April bill 5 days late (I was paid ahead on the account so no late fees for this), my extra payment, and my regular May payment. Had Kwik-pay been enabled, only $500 would have gone to the smaller balance and $600 would have gone toward the larger balance.

In favor of interest rate reduction

Obviously, on a balance of around $90,000, the difference between 4.5 percent and 4.75 percent is significant. It’s actually somewhat difficult to determine the exact savings, however. I’m on a graduated payment plan and my servicer doesn’t provide information on when the payment resets or by how much the payment will increase.

Additionally, student loans typically amortize like a mortgage does. In the beginning of the loan term the majority of the monthly payment goes to interest. Over time, more and more of the monthly payments are allocated toward principal. In addition, my servicer doesn’t provide an amortization schedule. All I can see is how much of each payment I make is allocated to principal or interest, as well as how much interest has accrued since my last payment.

I did plug some numbers into a mortgage amortization calculator to give myself a rough idea of the amount I’d save at the lower interest rate. I assumed a balance of $90,000, a 20-year term, and no extra payments. Using those numbers, my savings would be in the neighborhood of $3,000 over the term of the loan.

Obviously, $3,000 isn’t chump change. That’s a significant amount of money! There’s also the small but psychologically significant fact that I now have a mortgage with a rate of 4.65 percent. If I keep my student loans on manual payment, my interest rate on my student loans will be higher than my interest rate on my mortgage!

What would you do?

As I noted above, my assumptions regarding my student loans assume no extra payments. However, I have been consistently making extra payments and plan to continue to do so. That fact alone changes the numbers quite a bit. As a result, I am tempted to keep things flexible with manual payments. Paying off the small balance the fastest motivates me the most at the moment. That doesn’t mean I’ll always feel that way. Of course, I can re-activate Kwik-pay at any time.

If, down the road, I decide that the interest rate is the psychologically bigger deal, I can make a change. Perhaps after I’ve paid off the smaller balance completely and there’s only one place for any payment to go? I also remain hopeful that there will be some sort of student loan reform (not necessarily forgiveness) that will resolve some of the frustrations I have with my servicer.

My optimism stems in part from the existence of the Consumer Financial Protection Bureau (CFPB). The CFPB was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). It was formed in large part because of the advocacy work of Senator Elizabeth Warren, who also wrote All Your Worth: The Ultimate Lifetime Money Plan.

The CFPB takes complaints about student loan companies on their website and investigates them. In December, they issued a ruling that will enable them to provide oversight of nonbank student loan servicers with more than one million borrower accounts. They already provided oversight of banks acting as servicers. So help is on the way!

Senator Warren has also been extremely active in proposing legislation to provide relief to individuals with student loans, most recently the Bank on Students Loan Fairness Act. With #StudentLoanDebt trending like it is, I think it’s only a matter of time before the situation improves considerably for everyone with student loans.

If you have student loans, what interest rate are you paying? Do you pay more than the minimum amount due and, if so, how do you decide how to allocate those payments?