Sunday, May 23, 2010

The Price of the Road Not Taken

Curiosity didn't kill this cat, it just made her feel like a big dope.

As you have probably figured out from reading this blog, I don't go anywhere in a straight line. I take detours, and roads not taken, and wander aimlessly off the path to satisfy my curiosity. I like to think this makes me a more interesting person. Others tend to think it makes me flaky or aimless or lacking direction. Whatever.

In any case, one of those little detours took me to an expensive library school, which was stupid for a couple of reasons, more for the "expensive" part than anything else. In fact, if I have a regret about it, that would be the fact that I chose and expensive private school (which was so NOT worth the money) rather than a cheaper state school. I think I had something to prove to myself, like that, at some point in my life, I actually could go to an expensive, private, northeastern school. Live and learn.

This little detour put me in debt. Heavily in debt. Something that the PhD did not do, incidentally. When I was broke and living on $15/hour, I consolidated all of the loans. That lowered the amount that I had to pay each month. From what I can tell on SM's* website, the consolidation was actually two consolidations -- one subsidized, one unsubsidized -- both with 6.25% interest rates.

Since June 2006, I have dutifully been paying SM the equivalent of a car payment** each month. Pay. Pay. Pay. Pay. Pay. Every month for the past 47 months. I don't even have to think about it because I set up my bank account to pay SM automatically every month, and SM stopped sending paper statements, either by their policy or my request I can't remember. In any case, the paper statements just said, "pay this amount," and nothing else, like how much I still owed and what last month's payment actually paid. All information that I would have liked to have known, and can find on the website, but which didn't change anything in any direction anyway.

From June 2006 until right now, I hadn't really thought about the loan at all except to joke about it. The thing was just there to be paid, right up until I die, and there isn't anything to do about it. It serves as a financial reminder that the road not taken often has a toll booth, and I set it up so that I don't have to be reminded of it too often, kind of like an E-Z Pass.

For some reason, however, I became curious as to how much I had left to pay on it. I figured that, given the amount that I pay every month, even with interest, I should have knocked out a good chunk. In the past year and a half, I've started seriously saving for the first time in my life. That is, I've been saving for something other than yet another degree. I put about as much into savings each month as I put into the student loan and have saved up a nice, comfortable chunk that won't buy me a house or even allow me to purchase a car in full. Hell, it won't even keep me afloat for a year of unemployment if necessary; but it does buy me some peace of mind from month to month, knowing that I have a cushion in case of some unexpected expense.

The point here being that, if I can save up that much in a 16 months, how much of my loan must be knocked out with the same payments for 47 months? I figured that I should have made some headway, right? Imagine my surprise when I pulled up my account and discovered that the loan itself had been paid down only a couple of thousand dollars. Not even half of what I had paid. Not even a quarter.

Children, if you are reading this, this is the reason that you should work hard at math and figure out how percentages work long before you are 42 years old.***

Now, the way the SM website works, you can see your loan history, which showed me taking out the loans, then consolidating them. You can also see your payment history, which showed me dutifully paying the same amount every month for 47 months. With that payment history, however, they show how much of that payment went to the loan and how much went to the interest. For some unknown reason, possibly because I only recently began to understand the concept of percentage, I had assumed that the payment was split equally between the interest and the loan.

Nope. More goes to the interest than to the loan. In fact, early on, almost all of the payment went to the interest. On the history, I see a trend that shows that less of the payment is going to the interest and more to the loan over time. While I don't entirely understand the reason that it is not a consistent decline -- some months the amount going to the interest jumps up above the previous month, and down in the following month -- I do understand that the reason for this is that the slowly declining amount due on the loan means that the amount of interest also declines. This past month, more went to the loan than to interest, so I hope that is going to remain the trend and that the loan amount itself is going to start to decline at a faster rate.

I also understand, after poking about the website, that I cannot pay down that original loan amount. Ever. Any payment that you send goes straight to the interest, which never goes down until you pay the whole damn thing off. So, you can't send more money in the hopes of pushing that original loan amount down in order to lower the overall amount of interest because that extra money just goes to the interest. Essentially, you are taking out two loans when you take out one: the first is the actual loan, the one that goes to the school, and the second is the one that goes to SM for lending you the money. They take their cut first.

I'm going to guess that, if I won the lottery and could pay the whole amount tomorrow, including interest, they would charge me for bilking them out of the continued collection of interest for the next -- jeez, how long? They don't exactly have a schedule that shows how long this will all take until the whole thing is paid off, assuming that I keep paying at this rate.

Yeah, I just figured this out. Remember, it took me to this age to finally learn how to work out percentages. I'm not protesting it because this is how finance works. I'm just processing it. I'm also astounded at how little I know about finance. I suppose if you are shockingly unable to do math, operate on the principle of "don't spend more money than you make," even when you fail at it, and only think in terms of "how much will I have to pay each month" when considering debt, then you end up quite ignorant of how money works.

I'm not any worse off than I was before I decided to take a closer look, except for gathering even more evidence that I am decidedly the most mathematically incompetent person on the face of the earth. I will still be paying this damn thing off until the day I die, and even a little beyond. Of course, then, I can leave it in my will to my worst enemy!****

*SM: hee! I just realized that the loan company's name resembles S&M, which is sort of what it feels like!

**The amount is the equivalent of the payments on my last car purchase in 1999, which I paid off in 2004.

***Really, I just figured out how to work out percentages this year, after 42 years of learning, re-learning, re-re-learning, and failing every time. It was as if the information went into my head, and I understood it while it was being explained to me; but two seconds later, when I tried to do the same thing, I couldn't. It was as if the information had just slid out of my head. Again and again and again, and the way to figure percentages just wouldn't stick. Hell, even the abstract concept wouldn't stick. Then, suddenly, this last year, something clicked and I understood. I'd work percentages just for the hell of it because I finally could.

****I don't think you can actually do that.


Courtney said... can't pay off the balance early at all, or you can't pay extra payments and have them applied straight to the principal? (In other words, can you refinance this beast with another lender with more ethical practices?)

It's pretty standard with any large long-term loan for the amortization schedule to favor interest over principal in the early years of the loan. Mortgages and car payments both work this way. However, most of the loans I have had in my lifetime allow you to pay extra on the principal. In fact, I had to struggle with one car lender when I wanted to get a payment ahead on my car note--they kept trying to credit it toward the principal when I was trying to set it up so that I could skip a payment if I needed to.

It might be worth investigating whether or not this loan can be refinanced with a lender who will allow you to chip away at it faster. Also, if you can afford to refinance the balance over a shorter period of time, you will save some $ in interest that way too.

(Just as a funny aside--the word verification for my comment is "con me." How appropriate!)

Feminist Avatar said...

Yep, I agree with Courteney. I would explore refinancing with someone else, making sure that you are allowed to put payments towards the capital if you wish. This often has a name like a 'flexi-loan' but always read the small print.

You would also need to talk to your current finance people and find out if you would need to pay a penalty, which is what usually happens. This will help you see if it is worth your while financially- sometimes if you transfer a loan the new financer will eat your penalty.

Another reason to refinance would be to get a lower-interest rate which might be possible in this current economic climate; if this is possible it might be worth paying a penalty in the long run.

Of course, if you refinance you may also be tied in to your new finance company, so you would need to see for how long and any penalties you would pay.

The Steel Magnolia said...

I just figured this out, too. So I don't look anymore. I've gone back to blindly paying the money. My statisticition husband laughed at me when I gasped in disbelief that my extra payments were in vain. It's very sad.

RPS77 said...

It sucks that so much time spent paying hasn't gotten you a lot closer to completely paying off the loan. Loan companies arrange things to get as much money out of you as possible. It's often in the borrowers interest to pay more than the minimum payment from the very beginning, but this isn't possible for a lot of people given their financial situations.

On an only-slightly-related note, if you were going to a private college with a MLS program in a New England state, and you finished in 2006, I'm pretty sure we were in the same program at the same time.

Ink said...

I'm so sorry!

It makes me insanely mad that the lenders make WAY more than they should. And the borrowers are always screwed around.

*shaking fist in solidarity*

feMOMhist said...

Hmm I too was doing the same thing until one day I did the math and realized I'd still be paying off my Ph.D. when fMhson started COLLEGE. I am also consolidated with Sallie Mae back in the dark ages at almost the same interest rate. I started paying $200 over the required minimum payment and that amount DOES go to principal. The thing that cracks me up is how one or two days difference changes the amount applied to principal v interest. First column is amount applied to principal , second to interest. I'm still not half way to paying off, but as you can see at least I pay more to principal than to interest!!!

04/27/2010 $-382.02 $-167.98
03/26/2010 $-416.81 $-133.19
03/01/2010 $-366.51 $-183.49
01/26/2010 $-369.61 $-180.39
12/24/2009 $-394.87 $-155.13
11/26/2009 $-381.63 $-168.37 10/27/2009 $-390.79 $-159.21
09/29/2009 $-365.84 $-184.16

Professor Zero said...

Yes, refinance. I just figured something similar out about my home equity line of credit which it will take me 23 more years to pay at minimum payments, they say. If they receive extra payments in the FIRST week of the month these can go to principal but if not they go to interest. I am going to refinance the house and put the line of credit + the mortagage together at lower interest and less time, such as 10 years for both. It will not put payments up very much because cutting down on time and if lucky interest rate will cut down on total interest.
But I have to wait because what I owe on mortgage + second mortgate is over 90K and that is more that 80% of the conservative assessed value of the house.

So I am waiting, in which time total amount owed does go down, and trying to fix more and more things on the house, so that its assessed value can go up (the credit union wants to assess up, anyway). In this way, I hope, before interest rates rise, my debt will equal only 80% of the house's value and I can jump.

Worse: why I got the home equity line of credit: to consolidate credit card debt. Why I had that: professional travel, books, a computer, and some health issues. Normal stuff but that isn't covered by my university they way it would be at some. And I was depressed so I didn't feel like suffering more, limiting life more, so I just paid with plastic.

Digger said...

Yoiks. I'll echo what everyone said about looking for a refinance with either no (preferable) or very very small penalties for pre-payment.

Your milage may vary, of course... I'm sure I'm still paying interest on a pizza I put on my charge card when I was an undergrad. So.

Clio Bluestocking said...

Wow, thank you all!

I poked around on the website of SM and found that, yes, extra payment does go to the principle; but, up to this point, the amount of extra would have to have been HUGE in order to make any dent in anything. That's interesting, feMOMist, that a few days can make a difference, too. I'll look into that because I can change the date of the automatic payment if it can make a difference. I will definitely look into refinancing if the interest rate can go down.

This is really only the second loan that I've ever had -- if you count all of the student loans as one. The other was for my car. Again, I never thought in terms of anything other than "how much will the monthly payment be?" I got the way interest worked on credit cards, but somehow I hadn't really thought about how it worked on these bigger loans. I just paid and never thought about it. The car loan had an end date, but the student loans? Always until I died, and I clearly wasn't exagerrating!

I think about this, and how this was just my own foolishness and only over 1 1/2 years. Then I think about our students and what they have to pay and for how long. Make more loans available to them, Obama? Sure, that helps more people have access to education, but that seems like it is just the means to an end. The end would be more money to the insurance companies. Tax the hell out of the insurance companies (and the other businesses that think they can drive our curriculum) to make education more affordable in the first place? Well, that's just crazy talk!

(I really shouldn't read the news first thing in the morning.)

RPS77: I was at that school from the beginning of the fall in 2004 to the end of the fall in 2005. I take it your experience on the education side was better than mine! Did you start or finish in 2006?

The overall experience, however (other than the abject poverty, debt, bad boyfriend, and feeling like I had made a HUGE mistake), was pretty awesome since I was, after all, the world's oldest member of the drama club! Big roles in three plays made up for much more than you would imagine, and I wouldn't have traded that or living in Boston for anything.

feMOMhist said...

yup Clio, I borrow just under $50K. I had one of the low payment plans, so I think I've been paying between $250-$350 since the late 1990s. The freakin' balance had hardly moved at all. I kept the same payment plan, Max 2 I believe, but now I pay $550/month (yay for marriage to someone who makes way more money than me) and now I've got it to just under $28K. I seem to have reached the tipping point because now unless I seriously increase the payments I cannot shorten the length of the loan significantly. I am tempted to up the payments to $750/month once fMh girl doesn't havve childcare any more (OH HAPPY DAY) but right now I won't be paid off until april of 1015 which is messing with my plans for full year sabbatical in 2011-2012. At half pay I may have to drop back down to the minimum payment SIGH

RPS77 said...

I was at the school starting in the fall semester of 2005, and got my degree in early 2007. (I was lucky enough to have a good amount of money saved up, so I was able to go straight through with a full course load 4 semesters in a row without having to work more than part time at any point.)

My experience was better than yours, but then again I didn't have a PhD - after doing that I can only imagine that taking courses in a mere Master's program must have seemed like you had taken at least a couple of steps backward. I, on the other hand, was there partly because I had already concluded that I didn't have the focus or mental discipline to go for a history PhD, so there was no disappointment or feeling that I had set my sights too low.

Clio Bluestocking said...

RPS77: How funny! I wonder if we were in a class together during that overlap? Photo archives? Archive appraisal? That godawful database class? Records management?

I think, had I gone when I had finished my master's degree, or even my bachelor's degree, my experience overall would have been much better. Also, it wasn't so much that it was a master's program as that it was a master's program that felt as if it could easily have been a bachelor's program (except for cataloging -- damn that kicked my butt!). Of course, that again could have been the context in which I entered the program.

The sights too low part came more from the job that I got coming out of school. Had I been in a position that was a bit more challenging, with a bit more responsibility, I might not have been so depressed. My archive interships were like that -- challenging and with responsibility -- believe it or not; but, That Place (not the school but the place where I worked after) was brutal in so very many ways. It was the only place ever in my life where I honestly knew, "there is a world beyond the borders of This Place and maybe three people around here seem aware of it."

In any case, it does do my heart good to know that the school worked out for someone!

RPS77 said...

I took archive appraisal and records management, but I don't believe that either one was during my first semester (fall 2005). I remember taking courses in reference, management, and general introduction to archives that first semester - plus at least one other class that escapes me now. (I tend to have trouble remembering which semesters I took which classes in, even when I can clearly remember the classes themselves.)

If I remember correctly, the photo archives and database classes were electives that I didn't end up taking.

Cataloging kicked my butt too, but it turned out to be very helpful since I got a full time job as a cataloger!

I am sorry that you spent so much time and effort on something that turned out to not work for you.

I understand why you think that the program lacked the challenge or rigor of most other Master's programs. I heard quite a few fellow students say more or less the same thing.

sptc said...

I am amazed at how many people think only in terms of monthly payment but I think that is how things are sold.

There is a reactionary in my hotel in Mexico who says the smart thing to do for the coming meltdown is max out credit cards to buy gold bars. He might not be wrong. Mark my words.


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