Advice for new Grad $100,000 in debt

[NeilB4Zod]

So I've decided to take MMM's approach to financial freedom through Badassity :-) But I'm $100,000 in debt from undergrad and graduate ed loans. The interest rate on my consolidated loan is 6.8%

Should I make principle payments to my ed loans or invest my extra cash? My new job pays $65K a year, and there is possible overtime at $47/hour. It's a software engineering position so I do expect plenty of overtime. My net pay is about $950/wk. Also, I have the option to pay off the loan in 10 years for a monthly payment of $1150/mo (total payment of $138,096.40) , or with an extended fixed payment of $694/mo for 300 months (total payment of $208,220)? Which of those options is better and why?

Also, how should I invest my earnings - expenses - ed-loan payment money?

[Paul der Krake]

Unless you know you can beat the return by investing somewhere that yields more than 6.8%, pay it down as aggressively as you can. You work in software and don't mention any dependants which leads me to believe you can survive with a minimal emergency fund. Redirect every spare dollar to your debt.

[NeilB4Zod]

The stock market returns 7% historically, and I doubt that I can beat that without much investment prowess, so I'll take your advice.

[Mazzinator]

We also have a ton in SL debt...so i feel your pain. Here's my vote..

Put them on the 10yr plan. When you pay any extra on them, you probably have to mail in the payment with a note that says apply to principal. Normally, depends on the sl company, they prepay the loan by paying interest first towards the next month. (Hope i'm explaining this clearly??)

Log into their website and see how you can make payments. Some you can pay just one of the many that are consolidated. If so, pay it snowball style. Also, most sl, the interest accrues daily!! So, it benefits you to make a payment sooner rather than saving it up for one big payment.. It may not help much, but that interest rate is super high!!!

Also, this next plan is not for a semi mustachian...if you are full beard, in it to win it type...then try this ;-)

Transfer over some of the balance to a 0% credit card. You probably have to pay 3% transfer fee, although i found one which waived that too (usaa mastercard) this way you are saving the interest from compounding. 3% is still less than 6.8% BUT BEWARE..if you mess up one little bit, late payment, don't pay it off or transfer it in time, they will bump your interest rate up A LOT...then you just screwed yourself.

And i'm sure at 6.8% you will meet the $2500 deduction from your taxes in just a few months, so transferring some of the sl won't effect that.

For retirement, i would contribute up to the match only.. Once you get used to paying 30-50% of your pay to debt, you can easily switch to saving 50% of your pay for retirement...

Good luck..and knock those things out!!

[NeilB4Zod]

Thanks for the great advice, Mr. Murphy! I'll take it!

[NeilB4Zod]

Using the FinAid Student-Loan-Prepayment Calculator, I found the following analysis using 50% of my net pay as the monthly payment.

---------------------------------------------------------

Loan Balance:    $100,000.00
Loan Interest Rate:    6.80%
Loan Term:    10 years
Regular Monthly Loan Payment:    $1,150.80
Extra Payment:    $751.00
Extra Payment Frequency:   Monthly

Without Extra Payments
Number of Payments:    120
Total Payments:    $139,247.37
Total Interest Paid:    $39,247.37

With Extra Payments
Number of Regular Payments:    63
Cumulative Regular Payments:    $72,500.40
Number of Extra Payments:    63
Cumulative Extra Payments:    $46,566.22
Overall Total Payments:    $119,066.62
Total Interest Paid:    $19,066.62

Savings
Prepayment Savings:    $20,180.75
Reduction in Interest:    51.42%
Reduction in Payments:    14.49%
Reduction in Loan Term:    4.8 years ( 47.50%)

----------------------------------------------------------

So I can pay this loan off in 5.2 years and save $20,180.04! That's awesome!

I'm going to ride my bike and get a bike trailer for groceries and stuff too. That seems like a no-brainer. If I need a car for inter-city travel, I'll just rent one.

http://www.finaid.org/calculators/scripts/prepayment.cgi

[Paul der Krake]

That's the spirit! With your salary and future raises, you could end up getting rid of these loans a lot sooner than you think.

[simonsez]

Yep, since you consolidated, just keep the standard plan and pay it down ASAP with extra payments.

Are all your loans consolidated into one or do you have a consolidated loan in addition to a few other school loans?  That could change the strategy.

[NeilB4Zod]

I will be consolidating all the loans into one very soon.

[simonsez]

Oh okay.  I would advise against that unless there is something I don't understand about school loan consolidation.  What do you gain from consolidating?  To my knowledge, all consolidating does is give your loan the weighted average of all your prior interest rates.  It does not reduce principle or have any benefit IMO other than aesthetic simplicity?

If you haven't consolidated and your loans are federal (could be okay with private, but you just have to read the details about any possible penalties for paying back early), I'd say change your repayment plan to graduated-extended (25 year plan that bumps up payments every 2 years).  It would appear you will pay the most in interest this way but you won't have any real intention of being on the plan for 25 years.  All it does is ensure that the minimums are being paid on ALL your loans so that way every dime of your extra payments could be put toward your high interest loans.  Consolidating negates the ability to focus on the loan with the highest interest.

e.g. you could pay ~1100 per month on the standard with whatever extra payments you like going toward the 6.8% consolidated loan
OR
you could pay ~500 per month starting out on the graduated/extended plan with that extra $600 and the other amount designated for extra payments being focused on your non-consolidated loan(s) with the highest interest, thus saving interest compared to a consolidated plan

As long as the total of your payments under the graduated/extended plan are at least equal to the original standard plan amount, and you use all your extra payments put toward loans that have a higher interest rate than the weighted average of all your loans, you WILL come out ahead.

[Mazzinator]

I agree with simonsez! If they are not consolidated yet.. Doing what simonsez helps you snowballl them faster, and see more progress quicker.

Log into their website and see how you can make payments. Some you can pay just one of the many that are consolidated. If so, pay it snowball style.

That would save you from needing to do this..

[dahlink]

I don't know a whole lot on the student debt vs investing but Clark Howard gets call on this from time to time.  He usually asks people if they have a public loan (stafford?) or a private loan.  Apparently, if it is a public loan there are resources that could allow you to defer the loan and interest for sometime and even qualify for debt forgiveness down the line.  Private loans on the other had he recommends never taking them on because the debt is essentially permanent (immune to bankruptcy or something).  Anyways, if the loan can be deferred, you could start saving and investing without having to pay any principal or interest in the short or even longterm.  I would recommend heading over to his website http://www.clarkhoward.com/ or even call in his show and him.  I cannot remember but there are websites to guide with deferring the loan or requesting debt forgiveness.  Judging by Clark's detest of private student loans, I hope for your sake that you have mostly public loans.  If not, I would pay it off as soon as possible.

[simonsez]

Interest still capitalizes (accrues and is added to the principle) during deferment.  Deferment is for people that need to bury their head in the sand while they try to find a job.  I would only go that route if forced to in extremely dire circumstances where deferment would be better than late payments or defaulting.  As for loan forgiveness, if you fit the criteria now, and will for ten years, then go for it.  Just make sure your job doesn't change and your income stays low.  It pigeonholes your plans for awhile but could work for some I guess. I'd guess your job already, especially with OT, would preclude you from qualifying all ten years (or at least to a point where it is no longer remains advantageous over aggressive repayment).YMMV

[Mazzinator]

Again, i agree with simonsez..

Sorry dahlink, but student loans, forgiveness plans, repayment plans, etc. are very complicated.. Especially the public (federal) loans.. The big gov never makes anything so simple as to "just defer the loans and start investing" You must take much more into consideration before taking this leap..

[dahlink]

my mistake on the defer & forgiveness info.  clark howard talks about it but since it does not pertain to me the details don't sink in.  However, I would still recommend taking a look at this post on his website about federal loan payment plans and debt forgivness.  http://www.clarkhoward.com/news/clark-howard/personal-finance-credit/student-loan-guide/nFbc/

maybe its work a look for some.