Makin' Money

Kathy Kristoff on avoiding a shady practice

Chris Farrell Feb 1, 2011

**Question: **Eric is a software applications manager for a federal contracting company in Huntsville, Alabama. He also has a graphics and web design company on the side that works with nonprofits and churches. And, as if that wasn’t enough, Eric is heavily involved with Big Brothers Big Sisters and Boys & Girls Clubs. He has some $27,000 to $28,000 in student loans. He wants to be debt free. He keeps making additional payments every month but the principal on the loans isn’t going down much. However, his lender says he doesn’t have to make another payment until 2013.

Kristoff: This is a shady practice. Your additional payments on the loan should be going toward paying down principal. They aren’t doing that. They are continuing to accrue interest on the principal. You need to fix this.

Make it clear to the lender that the extra payment is to go toward principal. If they want you to write two checks, with one earmarked for principal, do it. Don’t pay the lender $1 more that isn’t going toward principal.

Here’s another option: You’re paid up to 2013. Tell the lender you want all your payments until then to go exclusively toward paying down principal.

I would deal with the lender in writing so that you create a paper trail if there are any problems.

Most legitimate lenders apply additional payments to principal.

(Edited. You can listen to the full interview, including how Eric teaches the basics of money to youngsters here.)

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