How to Avoid Negative Amortization on a Wells Student Loan

| January 2, 2012

The Wells Student Loan offered by Wells Fargo Bank makes the dream of a college education a reality for millions of students. Unfortunately, if you don’t fully understand the effects of some of the terms of your loan, that dream can turn into a nightmare after graduation.

One of the terms of your Wells Student Loan provides that, if you do not pay the interest on your loan as it accrues, it will be added to your loan balance, thus increasing the capital amount that you owe. This provision is known as interest capitalization. It’s a form of negative amortization, and it can cause the balance of your loan to increase by 20% or more during the time your payments are deferred while you’re going to college.

That’s the bad news.

The good news is that you can prevent this from happening, if you take steps right from the start of your Wells Student Loan to keep up with the interest that begins to accrue from day one.

For example, let’s say that your interest rate is 6% a year, or .5% a month. If you borrowed $10,000 at the start of your freshman year, then the interest that would accrue each month would be .5% times $10,000, or $50. With a part-time job waiting tables in the dorm, or working a few hours a week in the library, you could easily keep up with the interest payments and this, in turn, would prevent your $10,000 loan balance from mushrooming to a much larger amount.

Most college students don’t understand positive amortization, let alone negative amortization; but, if you were willing to be one of the exceptions, then you could do more than just keep your loan balance from increasing. You could actually reduce it. All you’d need is a goal and access to a financial calculator that would enable you to figure out how much extra you would have to pay each month in order to achieve that objective.

The basic principal involved is that, during the first half of the payback period, your payment is almost entirely interest, so your balance doesn’t go down very much. However, if you contribute something extra towards the principal each month, you can cut years off the back end of your loan.

This principal also comes into play should you ever be tempted to consolidate your Wells Student Loans. When you consolidate the balances that are as yet unpaid, you start the first half of a new payback period all over again. If you sit down with your financial calculator first, though, you will easily be able to prove to yourself whether the terms of the new consolidation loan would save you money or cost you money.

Probably the most important thing you can do, with respect to each one of your Wells Student Loans, is maintain a high degree of organization right from the start. Put all the papers pertaining to each loan in a separate folder and summarize the most important information about the loan on a cover sheet.

Inform your Wells Fargo loan officer immediately, if you anticipate having trouble making a payment, because once your Wells Student Loan is in default, you lose your payment options and open yourself up to all the ways that lenders have of collecting on defaulted loans, including but not limited to preventing renewal of your professional licenses.

Now that you know how to avoid negative amortization, and how to make positive amortization work in your favor, you’re in an excellent position to use Wells Student Loans responsibly to fund your college education.

Category: Student Loan

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