Author Topic: Help me figure out in what order I should pay my student loans off.  (Read 1073 times)

aintnocoffeeshop

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Hello Everyone:

I'm obviously new here, so a quick intro is in order. I started reading MMM June 1st, while I was spending 110% of what I was earning. I saved about 60% this month and loved every minute. I used the savings for student loans. I plan to pay them off as fast as I can. But I don't really know the inner workings of how exactly these loans work and how interest compounds, so I need your help.

So here is my dilemma:

I have four student loans:
1. $10,000 @ 6.8% annual (w/ daily compounding; e.g. ~$2/per day); this loan is unsubsidized and is already accruing interest
2. $8,500 @ 6.8% annual (w/ daily compounding); subsidized and grace period ends 11/14/2013
3. $6,000 @ 6.8% annual (w/ daily compounding); subsidized and grace period ends 11/14/2013
4. $8,000 @ 5% annual (not sure how often it compounds [or even if that is the right word]); subsidized and grace period ends 3/1/2014

Total Loans: $32,500
Already paid off: $2,500 (just this month :))
Round about what I'll be able to put towards loans every month: $1,500-2,000

So here is my question (/lack-of-knowledge) about how interest works (I studied humanities, so all the engineers must resist laughing at me). In what order should I pay these off in order to minimize interest accumulation?

I'm pretty confident about these two things: until 11/14/2013 I'm throwing everything at loan #1 because it's already accruing interest, and until 3/1/2014 I should not touch loan #4. Once the first three loans all start accruing interest should I try and pay off their balances at the save time (i.e. having all three principles come down together: $8k, $7.5K, $7k ...) or should I pay minimum on 2 of them and tackle the third?

Again, sorry for the complete lack of understanding when it comes to interest compounding, but I could use a lesson from a Mustachian.
« Last Edit: June 29, 2013, 09:49:14 AM by aintnocoffeeshop »

BC_Goldman

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Re: Help me figure out in what order I should pay my student loans off.
« Reply #1 on: June 29, 2013, 09:56:33 AM »
I would focus on paying off #1 first. As you said, it's already accruing interest. 1-3 are all at the same interest rate so you might s well focus on one at a time and make minimum payments on the others. As you pay a loan off, it increases how much you can pay on the next one. #4 should be last as it has the lowest rate and longest period of deferment.

aintnocoffeeshop

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Re: Help me figure out in what order I should pay my student loans off.
« Reply #2 on: June 29, 2013, 10:34:46 AM »
I now feel pretty stupid having asked this question.

Just to confirm: you're saying that I should pay them off in the order I listed them while making minimum payments on the ones I'm not focusing on. Being as aggressive as I plan (about $1.5-2k a month), is this the payment schedule that will allow me to pay the least amount in interest over the course of the loans (assuming I can't up the amount the put towards the loans each month)?

Thanks for your help BC_Goldman.

Another Reader

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Re: Help me figure out in what order I should pay my student loans off.
« Reply #3 on: June 29, 2013, 10:47:17 AM »
If you hit the first loan with every nickel you can round up, you will have it close to paid off by the time the other two at 6.8 percent kick in.  In your shoes, I would make it my goal to get that one done before November 14th.  Sell everything you can, cut spending to the bone, take any overtime or side jobs offered, whatever it takes to get this done.  It puts you in a stronger cash flow position going forward when the other loans kick in.

Because the next two are at the same interest rate, I would then focus extra money on the one with the smaller balance.  Paying each loan off reduces your minimum payments and you gain more flexibility.  Once that one is finished, go after the one with the larger balance at the 6.8 percent rate.  Work on the 5 percent loan last, but don't let it linger.  Getting rid of these alligators will make you much more relaxed and able to move forward with investing for your future.

BC_Goldman

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Re: Help me figure out in what order I should pay my student loans off.
« Reply #4 on: June 29, 2013, 10:57:47 AM »
Yes, I would go 1, 3, 2, 4 for payoff order.

aintnocoffeeshop

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Re: Help me figure out in what order I should pay my student loans off.
« Reply #5 on: June 29, 2013, 11:07:15 AM »
That's awesome! You just gave me a shot adrenaline because I hadn't considered that I can fairly easily pay off that first loan by the time the others start accruing interest! I am going for it! (1, 3, 2, 4 it is.)

There is one more variable that I'd like to run by all of you. What do you all think about trying to get a personal loan from a bank, at a lower rate then I have on these loans, and using it to pay off these Dept. of Education loans with their crazy high rates? I suspect I can get a much better rate, maybe 4.5% or so. I have not done the research. The only downside I see (assuming I can get a lower interest rate) is that I will loose the support structure of the government sponsored loans. If shit-hits-the-fan and my wife or I loose our jobs (I'm just starting mine, since I recently graduated) or some other emergency comes up, the Nelnet folks (the government servicer of my loans) will be willing to work with me; banks (so I have heard) are less forgiving. I think with our new found frugality we'd be just fine because our expenses are so low. Is it worth looking into? Or is it not worth the risk since with my projecting payment schedule it may only save me 1 or 2k max.

mlipps

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Re: Help me figure out in what order I should pay my student loans off.
« Reply #6 on: June 29, 2013, 01:08:11 PM »
You can't get a personal loan at those rates. Some things you CAN do, if you have the discipline:

-Get a no interest on purchases credit card & pay only the minimum; pay the rest towards student loans. You have to do the math carefully here, but you can save a lot, there's a card from Citi w/no interest for 18 months
-Enroll half time in community college classes, which would put the subsidized loans into deferment & pay them off w/o paying interest; the tuition charges are probably less than the interest you'd pay otherwise

The knitter

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Re: Help me figure out in what order I should pay my student loans off.
« Reply #7 on: June 29, 2013, 02:22:52 PM »
You can't get a personal loan at those rates. Some things you CAN do, if you have the discipline:

-Get a no interest on purchases credit card & pay only the minimum; pay the rest towards student loans. You have to do the math carefully here, but you can save a lot, there's a card from Citi w/no interest for 18 months
-Enroll half time in community college classes, which would put the subsidized loans into deferment & pay them off w/o paying interest; the tuition charges are probably less than the interest you'd pay otherwise

Smart idea on the credit card, but don't those often jump up to a high interest rate on all the purchases after the 18 months? They would have to be sure they could pay it off in full before that time to avoid a higher interest rate on that money.

homeymomma

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Re: Help me figure out in what order I should pay my student loans off.
« Reply #8 on: June 29, 2013, 05:16:41 PM »
I'm not sure if it's still available, but I consolidated my loans through a government program about a year ago. I got a .5% (I think?) reduction in interest rate for each loan, and an additional .25% reduction for enrolling in automatic debit.
I'm not sure if that program is still going, though.

As to which to pay off first, I would actually pay the higher of the two identical loans first, because the higher the balance, the higher the interest will amount to, right? I.e., 6.8% of 8000 = 544, 6.8% of 6000 = 408. So, if you're going to just let one sit there for a while, shouldn't it be the lower principal one?

My thoughts. Good luck!

aintnocoffeeshop

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Re: Help me figure out in what order I should pay my student loans off.
« Reply #9 on: June 29, 2013, 08:08:08 PM »
Thanks for all the advice. I'm set to tackle this thing quick.

I'm going to look into that credit card around the time loans #2 and 3 start to accrue interest (early November). I'll be able to pay off the $22k in 18 months (with no interest b/c of the credit card) easy. That's only $1,222 a month. I'm looking at around 1.5-2k a month. I can't wait to be free of it and start working toward FI.

Also, the community college idea won't work in my case. I need to be full-time and the interest, as I stick to my regime, will be less than community college tuition. But it may work for folks with much higher amounts of debt.

This forum community is awesome and full of ideas. Keep up the good work supporting each other.

Rebecca Stapler

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Re: Help me figure out in what order I should pay my student loans off.
« Reply #10 on: June 29, 2013, 10:04:41 PM »
If you hit the first loan with every nickel you can round up, you will have it close to paid off by the time the other two at 6.8 percent kick in.  In your shoes, I would make it my goal to get that one done before November 14th.  Sell everything you can, cut spending to the bone, take any overtime or side jobs offered, whatever it takes to get this done.  It puts you in a stronger cash flow position going forward when the other loans kick in.

Because the next two are at the same interest rate, I would then focus extra money on the one with the smaller balance.  Paying each loan off reduces your minimum payments and you gain more flexibility.  Once that one is finished, go after the one with the larger balance at the 6.8 percent rate.  Work on the 5 percent loan last, but don't let it linger.  Getting rid of these alligators will make you much more relaxed and able to move forward with investing for your future.

+ 1

I would not try that hinky credit card thing, but maybe I don't understand the benefit. Is the idea that you would put your expenses on the cc and pay the minimum during the 0% interest period, but use the $$ you would otherwise put towards expenses into your SLs? What will you do with the 0% expires and the astronomical cc rate kicks in? It will have taken you 9 / 12/ 18 months to rack up the debt -- where would you get the $$ to pay it off before it accrues interest? I think your best bet is to cut expenses deeply now and pay those fuckers off ASAP, starting with 1, then 3 (because you will pay it off more quickly and therefore free up $$), then 2 and then 4.
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BC_Goldman

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Re: Help me figure out in what order I should pay my student loans off.
« Reply #11 on: June 30, 2013, 12:27:00 AM »
As to which to pay off first, I would actually pay the higher of the two identical loans first, because the higher the balance, the higher the interest will amount to, right? I.e., 6.8% of 8000 = 544, 6.8% of 6000 = 408. So, if you're going to just let one sit there for a while, shouldn't it be the lower principal one?

My thoughts. Good luck!

I don't think it really matters since the rates are the same. There's $14,500 between two loans with both accruing daily interest at just over $82/mo total between them. So if he pays $2,000 in one month it won't make a significant difference if he does all on one or the other or even splits between the two. Almost his entire payment would be going to principal reduction. Advantage of paying off the smaller one first is mostly psychological (goodbye, loan) but also lowers his monthly expenses slightly in case something unexpected happens.

aintnocoffeeshop

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Re: Help me figure out in what order I should pay my student loans off.
« Reply #12 on: June 30, 2013, 02:57:05 PM »


+ 1

I would not try that hinky credit card thing, but maybe I don't understand the benefit. Is the idea that you would put your expenses on the cc and pay the minimum during the 0% interest period, but use the $$ you would otherwise put towards expenses into your SLs? What will you do with the 0% expires and the astronomical cc rate kicks in? It will have taken you 9 / 12/ 18 months to rack up the debt -- where would you get the $$ to pay it off before it accrues interest? I think your best bet is to cut expenses deeply now and pay those fuckers off ASAP, starting with 1, then 3 (because you will pay it off more quickly and therefore free up $$), then 2 and then 4.
[/quote]

The plan is to tackle Loan #1 (which is already accruing interest) before Loans 2 and 3 start accruing interest (mid November), in which case I will have $22k left in SL debt. If I can get a CC in early November with 18 months of 0% APR I can use that to pay off the loans that have started accruing interest. I have a very good credit score (haven't checked it in a year or so but it was almost 800), so I may be able to get much of that $22k. This then means that I have 18 months to pay off $22k with no interest accruing. That averages out to $1,222 a month that I need to put toward SL/CC-debt-taken-out-to-pay-the-loans. I can handle that before interest starts accruing on the CC because I can put anywhere between $1.5-2k into SL/CC payments a month. If this all goes to plan I think I can pay off my SL debt around the early months of 2015. This would mean I would have only paid about $1k in interest on my $34,500 student loan! That would be awesome.

I agree with BC_Goldman on the math of Loans 2 & 3. The order does not matter when it comes to interest accrued, what matters is the psychology behind getting rid of one loan and starting on the next (I think).

Chemistay

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Re: Help me figure out in what order I should pay my student loans off.
« Reply #13 on: June 30, 2013, 03:36:57 PM »
It might be worth consolidating #2 and #3 in November if you can get a slightly lower rate so you can be paying them both off aggressively at the same time. You'll have to run the numbers though after seeing what kinds of rates a consolidation would offer. Also - consolidating will mean they automatically come out of deferment so wait until November if you're going to do that.

If you want some inspiration check out nomoreharvarddebt.com and read through from the beginning. He starts out with a pretty whiny attitude but it gets way better towards the middle and you can see how much effort he put into getting those loans paid off asap. I think you're already starting out in a better place because of your positive attitude. :-)

mlipps

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Re: Help me figure out in what order I should pay my student loans off.
« Reply #14 on: June 30, 2013, 05:49:00 PM »
If you hit the first loan with every nickel you can round up, you will have it close to paid off by the time the other two at 6.8 percent kick in.  In your shoes, I would make it my goal to get that one done before November 14th.  Sell everything you can, cut spending to the bone, take any overtime or side jobs offered, whatever it takes to get this done.  It puts you in a stronger cash flow position going forward when the other loans kick in.

Because the next two are at the same interest rate, I would then focus extra money on the one with the smaller balance.  Paying each loan off reduces your minimum payments and you gain more flexibility.  Once that one is finished, go after the one with the larger balance at the 6.8 percent rate.  Work on the 5 percent loan last, but don't let it linger.  Getting rid of these alligators will make you much more relaxed and able to move forward with investing for your future.

+ 1

I would not try that hinky credit card thing, but maybe I don't understand the benefit. Is the idea that you would put your expenses on the cc and pay the minimum during the 0% interest period, but use the $$ you would otherwise put towards expenses into your SLs? What will you do with the 0% expires and the astronomical cc rate kicks in? It will have taken you 9 / 12/ 18 months to rack up the debt -- where would you get the $$ to pay it off before it accrues interest? I think your best bet is to cut expenses deeply now and pay those fuckers off ASAP, starting with 1, then 3 (because you will pay it off more quickly and therefore free up $$), then 2 and then 4.

Sorry, I didn't explain it very well. Yes, I'd only do it if you can pay off the loan AND the credit card before the promo rate expires. I saved several hundred in interest doing this, although I'll admit it was sort of stressful...

aintnocoffeeshop

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Re: Help me figure out in what order I should pay my student loans off.
« Reply #15 on: June 30, 2013, 08:41:21 PM »
I'm quite confident I can pay off the CC and the SL before the CC starts accruing interest. I would have 18 months from November on $22k of debt. That would mean I would need to average $1.2k a month for 18 months. I'll be averaging $1.5-2k (more if my part-time job turns into a full-time gig as my manager has promised me).

Even just being more mindful and frugal this past month has felt so liberating (I just finished off June with paying a total of $3k towards loans! I wasn't able save that much money in all of 2011). Spending sensibly does bring happiness as so many others have learned before me.