Paying Ahead, Falling Behind

Total Black: $472.38
Total Red: $269,947.64

As promised in And Again . . . , I called American Education Services, the student loan lender that I had set-up with automatic bill pay.  And now I remember why I stalled for so long.  Businesses don’t make it easy for you to untangle yourself from the electronic webs they weave. 

When I telephoned this morning, the customer service representative told me that I had only to fax a letter to the student loan lender and request that they cancel my automatic debit set-up.  Not complicated.  I noted as much in Head Meet Wall.  Certainly not as simple as unchecking a box on a website, however, or sending a quick email.  No, it has to be on paper with signature and all.  Why do companies tend to formalize certain aspects of their business unnecessarily?  At any rate, I type up the form and faxed it off.  I guess I didn’t follow through in March because of everything I had going on back then.  While I had her on the line, I thought I’d ask a question or two.  I’m not sure what prompted my line of questioning but I’m glad I did.

I asked what happened if I paid more than the minimum for the month.  In And Again . . . I noted that as one drawback to automatic bill pay, namely the inability to increase an automatic monthly payment.  She explained, as if on cue, that any amounts I pay go first to outstanding interest, then to the principal.  After that, the payments get applied against next month’s amount due.  So if I had paid ninety dollars on the eighty-eight dollars that was due this month, then two dollars would be applied toward next month’s charge.  When the bill arrived in the mail, I’d owe eight-six for that month since two dollars had rolled over. 

I had this happen to me when the law firm sent me abroad.  I had overpaid this same student loan resulting in months with a zero-due bill.  What’s better than receiving a bill and owing nothing, right?  How awesome, I thought back then.  When living paycheck to paycheck, one bill fewer makes a difference.  But I wasn’t sure exactly how it worked.  In my experience, SallieMae, for example, still bills each month even if they receive an overpayment.  How then was AES arranging this payment procedure?  I asked if whatever amount had been pre-paid could be applied to the principal.  The customer service representative told me—and subsequently repeated at least five times on today’s call—that how I’m billed is different from how my payments are applied.  Great.  But that explained nothing.  Distinction without a difference most definitely.  Eau du poisson was wafting up.  Thought I caught a wiff of rat nearby too. 

I wanted to dig down a bit further because this wasn’t making sense.  The amount due on this loan is approximately $12,000.00.  Hypothetically what would happen if I sent in five-thousand dollars today, I asked?  Would my payments be prepaid for fifty-six months?  The answer?  Yes.  I didn’t understand though.  It seemed as if AES was holding my money in some account in order to earn interest on it.  So I asked what if I wanted that amount applied against the principal.  I was told again that how I’m billed is different from how my payments are applied.  Ok.  So I asked next what if I paid the entire amount off?  Would the student loan account stay open with AES just drawing down the payoff amount each month until ten years from now—or longer—twelve thousand dollars had been withdrawn?  Like a lawyer’s retainer, I suppose?   No, I was told, if I paid it off in full, the account would be closed out. 

Next I asked if I paid some amount less than the payoff amount.  What then?  In that case, the loan would stay open and AES would hold my payment somewhere and draw it down until that pre-paid amount had been exhausted.  At that point, monthly payments would resume. 

Craziness.  At least you can’t pay SallieMae years in advance.

Finally, I relinquished my uphill climb.  I got as much information as I needed.  It didn’t look as if I could make large payments against my loan with this lender.  I wasn’t sure that’s legal, but I wasn’t about to battle that woman over this issue.  And just as we made nicey-nice again at the end of call, she informed me that this practice is called “paid-ahead status.”  And I could also request to not have the practice applied to my account.  I’d never heard that practice before.  So I did what most of us do; I googled it. 

Existential Funk blogged about this practie in his post “AES Repayment Scam — Paid Ahead Status” on his blog College Cashflow.  He noted that “when you pay more than your monthly minimum, you are thinking to yourself ‘I am going to save money by paying my loan off faster by making payments for more than the statement amount’. Well thanks to paid ahead status, that assumption is WRONG. Other lenders may call it something different, but most of them have this stipulation in there somewhere.”  I also came across a post title: Do you know how much your student loans are charging you? by capn_midnight on GameDev.net.  I’d never heard of the website and it looked a bit sketchy at first glance: no blogging forum I’m aware of.  But I couldn’t write a better analysis of this practice than what capn_midnight posted there.  He wrote: “In short, it means that, though you will end up paying your loan off earlier than the planned end-date for the loan term, you will end up paying the same amount of money on the loan as if you paid it over the full 15 years.  By queue the payments in this ‘Paid Ahead’ system, AES can charge the full amount of interest, because they control how quickly the principal is paid off.” 

I’m sure paid ahead status is legal, strictly speaking.  What I don’t understand, however, is why it seems that at every turn we must watch out for predators out to get us?  I don’t mean to sound overly inflammatory, but this does seem a bit of a trojan horse if ever I saw one.  You plod along happily thinking that you’re paying down your loan, then come to find out that the amount you’re paying over and above the minimum set by the lender is not going against the principal, it’s being held in limbo in some rainy-day account in case you don’t pay later.  And all the while your loans are still accruing interest.

Unfortunately “legal” doesn’t mean “ethical.”  Never did.  Doubt it ever will.  But it’s a sad day when education has become a means to keep people effectively impoverished.  Wasn’t is supposed to have the opposite effect?

In my faxed, typed, and autographed letter today I requested that automatic bill pay be canceled and that this paid ahead status be deactivated from my account.  If I overpay, I want that payment applied to the principle.  I’ll bank my own rainy-day fund, thank you very much. 

At least I hope I will.