Q: I have a consolidated student loan of about $90,000. I was told that I can’t pre-pay the loan until I pay all of the interest that has accrued that month, not just what is on my payment coupon.

When I pay additional interest on my mortgage, the lender applies the entire overage directly to my principal. I would like to find a comparable system for my student loan, as I paid over $9,000 past year, including about $3,000 additional principal, and only a little over $2,000 total was credited to the principal.

I have a home mortgage with a balance of about $65,000, but I have about $60,000 in equity in the home. Should I try to refinance the mortgage for a larger amount and put the extra on the student loan all at once? Or, is there a better way to reduce the student loan balance and, therefore, the interest I pay each month?

I looked into directly refinancing the student loan but don’t think you can reconsolidate unless you have another student loan that was not included in the original consolidation.

A: From the information you’ve sent, there are two possibilities: Either your lender is way off base, or you have a negative amortization loan.

With a negative amortization loan, you pay the same amount, even though the “true” cost of the loan is higher. The extra interest is added onto the back end of the loan, so in effect, you pay interest on interest.

It’s not a very good loan to have, and can be extremely expensive for you. But it would explain why the extra you pay each month isn’t being credited correctly. With a negative amortization loan, you’d have to pay the extra interest you owe on the loan – which is more than what is listed on your payment coupon – before they can credit the remaining extra payment toward your balance.

On the other hand, the lender could simply be calculating your loan incorrectly, and you are being forced to make double interest payments. If this is true, it’s illegal.

The only way to know if you have a negative amortization loan is to go back and read your loan documents. It should spell out exactly the way the interest is charged, how much you’re charged each month, and how the payments get credited.

You can also call the lender and ask a supervisor to explain why this is happening. If you can’t get anyone to help you, there are companies that will, for a fee, check the payments and loan balance to see if it is being calculated correctly. This could give you the documentation you’ll need in a future battle with your loan company.

If you are being charged incorrectly, and the lender refuses to help, contact the government agency that regulates lenders in your state.

As you suspected, you cannot reconsolidate your student loans, but fortunately, you can get a home equity loan and pay off a considerably chunk of this loan all at once. And, you’ll turn non-deductible debt into deductible debt. This is a smart way to have your money work harder for you.

Try to get a fixed-rate home equity loan at these low rates (which are hopefully less than you’re paying now on the student loan) and then pay off as much of the loan as possible. Once you do that, it may be possible to refinance the student loan at a lower rate elsewhere. But you should be able to cut your student loan debt at least in half.

Once you’ve done that, you should try to prepay that loan as quickly as possible. You should see the numbers move quickly after that because your current payments will include a lot more principal than interest. You have much less debt, so you pay much less interest on it, so more of your monthly payment will go to pay down principal and interest.

Hopefully, your student loans have bought you the credentials for a well-paying career and these payments won’t topple your budget and put your house at risk. This strategy should help you pay down all of your loans much more quickly.

Published: Feb 28, 2001