When my wife bought a car 30 years ago, she specifically asked for a plan that would allow her to pay it off early without penalty. She frequently would pay more than the minimum amount, and as a result, cut two years off the loan.

When she made her final payment, she called for the payoff amount, and received the quote. She wrote a certified check for the amount, and printed "Paid in Full" on the check with the account number as instructed.

Sure enough, she received the clear title to her car from GMAC and was very pleased...until the phone calls started coming from various levels at GMAC asking her to pay the additional amount of interest that she had eliminated by paying off two years early.

She pointed out that they had cashed the final check, based upon their quote of the total amount due, and that the check was marked "Paid in Full". She refused to pay anything more.

The calls continued, with people trying to tell her, "don't you feel that you ought to pay us our money...", "Gee, you're putting americans out of work," and "You're violating the contract we agreed to based upon your paying this extra interest to finance the loan..."

Finally, she'd had enough and let the manager know that if they continued to call or contact her, she would go to the local media and file a harassment suit against them considering she owned the car free and clear, and what they were doing was basically unwarranted, illegal harassment to extort money from her. She said the next call would provoke legal action against the manager specifically unless he took positive action to stop the calls and cancel the account.

She never heard from them again.
I know this is not a federal student loan, but the point is people can and do fight the system and get what they deserve for living up to their obligations and paying their bills early. It's worth a try.

I haven't tried this myself, but I have heard that you should make any extra payment with a separate check, sent with a letter instructing the lender/administrator to apply it to the principle only. You should make sure that you're current on your monthly payment first, or they may ignore your instructions. So, if you pay on the first of the month, send your extra payment and instruction letter on the fifteenth.

If you give this a try, let us Qlanders know if it worked.

Assuming that you are working with a Federal Direct Loan (http://www.direct.ed.gov) it appears that they have a specifically defined set of repayment plans with interest rates related to the length of the repayment period. There are also some plans that can be used by a student repaying their own loans that adjust to income being earned (not available for parent signed loans), http://www.direct.ed.gov/RepayCalc/dlindex2.html

Because you would be in one of those defined repayment plans they are treating the extra money being sent against the overall interest you are scheduled to pay. If you continued like this, I assume, they would inform you that your payments would end earlier but you would still end up paying the original plan amount, just over a quicker time. In short, it doesn't appear that they are prepared to apply any over payment to the loan principal and therefore lessen your overall amount paid. Read the descriptions of the plans and see how your loan payment program is structured.

Most of the site is aimed at how folks can deal with not being able to meet their repayment schedule and not paying it off early, so a phone call is probably is your best source of information, http://www.direct.ed.gov/callus.html

Having said that I should warn you that my own experience in talking to call center folks with the Direct Loan program is that you cannot trust the information you get. Try calling several times and ask the same question and see if you consistently get the same answer before you believe it. I would suggest you ask for any specific information about early repayment in writing from them also (always ask for a printout to be mailed to you so you have proof in your files).

I bet that it isn't possible to just send in extra when you can and expect it to be applied directly to the loan principal. My guess is you can restructure your payment plan but it would require you to pay more each month consistently. There may also be a way to pay off a sizable lump sum off principal and restructure the loan as a one time deal (like if you got an inheritance).

If i remember correctly if you are paying a federal direct loan there are two options in making additional payments one (default) is that the extra will be applied to your next bill, ie if your monthly payment is $50 and you pay $100 the bill for the next month should be $0 Or you can select an option to apply extra payment to principle.

Hope this helps