Student Loan Repayment Plan

[djballer]

Hello Everyone,

I need help on a strategy to payoff my student loans. I currently have $199,017 in student loans. I am a recent grad.

Loan 1: $164,428 @ 3.592% (variable, based on 90 day Libor + 2.97% margin)
Loan 2: $30,044 @ 3.25% (variable, based on prime rate)
Loan 3: $4,546 @ 3.150% (fixed rate)

Minimum monthly payments to the above loans are $1,678, $155, and $55 respectively.
I currently make the minimum payments on all the loans and paying extra payments to the largest loan with the higher interest rate. In all I have been paying about $2,500 monthly towards these loans.

I currently contribute 10% of my pre taxed income (~$1080 monthly) into the employer 401k plan.
My approximate monthly take home pay, after taxes, insurance and 401K is ~$6400.

I have $24k in emergency fund.

So my question is, should i focus on paying down the loans or invest in an IRA/index fund? So far, I have been building my emergency fund. My next plan is to start paying at least $4000 monthly towards the loans.

Thanks for your help.

[forummm]

Do you have a job (or intend to get one) that would qualify you for the public service loan forgiveness program? That forgives your loans after 10 years of qualifying employment. It sounds like you have a pretty decent income though, so perhaps this is not an issue for you.

If you're paying them off, I would still max out your IRA and any employer plan options (like a 401k) each year and then direct surplus cash to the loans. Your interest rates are all pretty low. And depending on your income they are tax deductible.

[AZDude]

At $4K a month, you should be able to knock out the first two smaller loans within the year. After that I would invest while paying the minimums, thinking that you can do better than 3.6%.

[Regisque]

I think it depends on your job security. Ideally you could do better by putting your money in the market and trying to beat the 3.6% but if you lose your job $1900 a month is a lot to scrape together. If your job is extremely secure though or you could get another similar one if you did lose it then I'd go in this order.
1. Max 401K
2. Max Roth
3. Some split between taxable accounts and excess payments on loans.
 

[onlykelsey]

I think it depends on your job security. Ideally you could do better by putting your money in the market and trying to beat the 3.6% but if you lose your job $1900 a month is a lot to scrape together. If your job is extremely secure though or you could get another similar one if you did lose it then I'd go in this order.
1. Max 401K
2. Max Roth
3. Some split between taxable accounts and excess payments on loans.

I second this plan, although it may be hard to swallow.  You could also move the huge loan up a bit in the priority and pay the minimums on the others while investing the difference, as 3.2 is easier to beat in the market.

[asiljoy]

Echoing Regisque, it depends on your job security, current bills, and how risk averse you are. There's nothing wrong with a plan that designates X% of income to retirement, Y% to saves for whatever, and Z% to loans. If you don't need to save for anything because you don't need a down payment, aren't worried about job loss, and feel like you have enough of a safety net, roll Y and Z together.

I have similar interest rates on my loans, but mine are only $44,000 total, so I feel comfortable letting those ride on the minimums while I build up retirement and refill a depleted savings account(yay emergency funds). Once I get 4 months of expenses saved up again, I'll refocus that money on the loans.

[randymarsh]

What is the max rate the 165K variable loan can rise to?

[forummm]

At $4K a month, you should be able to knock out the first two smaller loans within the year.

I thought about this tactic too. It's nice to be able to get your minimum monthly payment down in case you have some other use for money. But the smaller loans look less risky. If interest rates go up, the biggest loan could get pricey. In the event of a job loss you could get income-based repayment or forebearance to avoid having to pay for awhile. It's a hard call there.

[nawhite]

At $4K a month, you should be able to knock out the first two smaller loans within the year.

I thought about this tactic too. It's nice to be able to get your minimum monthly payment down in case you have some other use for money. But the smaller loans look less risky. If interest rates go up, the biggest loan could get pricey. In the event of a job loss you could get income-based repayment or forebearance to avoid having to pay for awhile. It's a hard call there.

Personally I think it's a pretty easy call. 3.15% fixed is the lowest interest rate you will EVER SEE IN YOUR LIFE for unsecured debt. I would hang on to that loan forever if possible. I'd worry much more about the higher interest rates and the fact that they are variable.

To put a dollar amount on it (assuming all the interest rates remain the same forever, which they wont) if you put $2500 extra per month towards the 3.592% loan vs the 3.15% loan, you are saving $0.92 per month per month remaining on the loan. At $2500 per month you'll have it paid off in like 65 months or better which means you'll save around $60 per payment over the life of the loan ($0.92 in interest x 65 months = $59.80 of benefit for the first month of payments, .92x64 for the second month of higher payments, etc). Another way of looking at it is that every month, you are saving yourself an additional $0.92 every month for the rest of the life of the loan. That will add up way faster than you think!

And this assumes that your interest rate on the variable loans wont go up (it will). Unless you are expecting some cashflow problems with minimum payments (with an emergency fund that large you shouldn't) pay off highest interest rate first. Avalanche beats snowball every time for those who have the mental fortitude to keep at it.

[2buttons]

Have you looked into refinancing into a fixed rate loan? Variable rates scare the bejesus out of me.  Even if they are low, at the trajectory you are paying them off, even a slightly higher overall interest rate that is fixed would give some peace of mind, and this is coming from someone that is a total rate watcher. 

Its been a few years since I dumped my loans, but I hear good things about SOFI. 

[rubybeth]

Do you have a job (or intend to get one) that would qualify you for the public service loan forgiveness program? That forgives your loans after 10 years of qualifying employment. It sounds like you have a pretty decent income though, so perhaps this is not an issue for you.

If you're paying them off, I would still max out your IRA and any employer plan options (like a 401k) each year and then direct surplus cash to the loans. Your interest rates are all pretty low. And depending on your income they are tax deductible.

It sounds like the OP is making a lot of money and can reasonably pay these off, I would not suggest PSLF for this poster. Also, student loan interest is only deductible up to $2,500, so paying them off quickly is preferred to letting a lot of interest build up: https://www.irs.gov/publications/p970/ch04.html

I'd echo the other poster that I'd attempt to knock out the two smaller loans in a shorter period, UNLESS you can consolidate these to one low rate. Paying off the smaller loans will feel like a big win each time you pay one off, and then you have the $210 freed up from those payments to put toward the larger loan. This is what DH and I did when we paid off our loans (snowball method a la Dave Ramsey), and it felt awesome to pay off some loans early in our snowball. Good luck!

[djballer]

Do you have a job (or intend to get one) that would qualify you for the public service loan forgiveness program? That forgives your loans after 10 years of qualifying employment. It sounds like you have a pretty decent income though, so perhaps this is not an issue for you.

If you're paying them off, I would still max out your IRA and any employer plan options (like a 401k) each year and then direct surplus cash to the loans. Your interest rates are all pretty low. And depending on your income they are tax deductible.

Yes, I currently have a job. I looked into the public service/ loan forgiveness route but decided against it. Most of the public service jobs in my field pays about 45k less annually. I figure i am better off being aggressive and paying it off within 10 years. Besides, I no longer qualify since i consolidated the loans. Thanks!

[djballer]

At $4K a month, you should be able to knock out the first two smaller loans within the year. After that I would invest while paying the minimums, thinking that you can do better than 3.6%.

My initial plan is to payoff the highest interest rate loans first, before attacking the smaller, lower interest loans. This is why i left the two loans out of consolidation.... I know it supposedly gives you a phycological win of some sort, per Dave Ramsey. In my case, I just focus on the total accumulated interest. I might have to reconsider tho. Thanks!

[djballer]

I think it depends on your job security. Ideally you could do better by putting your money in the market and trying to beat the 3.6% but if you lose your job $1900 a month is a lot to scrape together. If your job is extremely secure though or you could get another similar one if you did lose it then I'd go in this order.
1. Max 401K
2. Max Roth
3. Some split between taxable accounts and excess payments on loans.

I do intend to max out my 401k every year. I came close last year with 12k. I will not be eligible for Roth contributions this year and going forward, since I exceed the income limits. I do however, qualify to make the $5,500 max contribution for 2015. I know the deadline is 4/15/2016. I will have to act fast to do this. Thanks!

[djballer]

What is the max rate the 165K variable loan can rise to?

9%. My plan is to refinance it to a fixed rate loan if it gets close to ~6%. Hopefully i will have about 100k by then. I was hoping to qualify for the 3.5 % fixed rate when i refinanced, but got 4.9 fixed. I decided to go with the variable rate. I hope i don't regret this.... Thanks.

[djballer]

At $4K a month, you should be able to knock out the first two smaller loans within the year.

I thought about this tactic too. It's nice to be able to get your minimum monthly payment down in case you have some other use for money. But the smaller loans look less risky. If interest rates go up, the biggest loan could get pricey. In the event of a job loss you could get income-based repayment or forebearance to avoid having to pay for awhile. It's a hard call there.

Personally I think it's a pretty easy call. 3.15% fixed is the lowest interest rate you will EVER SEE IN YOUR LIFE for unsecured debt. I would hang on to that loan forever if possible. I'd worry much more about the higher interest rates and the fact that they are variable.

To put a dollar amount on it (assuming all the interest rates remain the same forever, which they wont) if you put $2500 extra per month towards the 3.592% loan vs the 3.15% loan, you are saving $0.92 per month per month remaining on the loan. At $2500 per month you'll have it paid off in like 65 months or better which means you'll save around $60 per payment over the life of the loan ($0.92 in interest x 65 months = $59.80 of benefit for the first month of payments, .92x64 for the second month of higher payments, etc). Another way of looking at it is that every month, you are saving yourself an additional $0.92 every month for the rest of the life of the loan. That will add up way faster than you think!

And this assumes that your interest rate on the variable loans wont go up (it will). Unless you are expecting some cashflow problems with minimum payments (with an emergency fund that large you shouldn't) pay off highest interest rate first. Avalanche beats snowball every time for those who have the mental fortitude to keep at it.

This was what I was thinking when I consolidated all my higher interest loans into the 165k loan listed above. I decided not to touch the two smaller loans. That 30k loan was at 3% for over 5 year until last week when i got an email from the bank that it's now 3.25%. I assumed the rate was fixed, since it never changed.

My plan is to pay the high interest loan down ASAP. Perhaps, 50k this year. If the rates starts to creep past 5%, then i would have to refinance. Hopefully, i will qualify for a low fixed rate. I turned down a fixed 4.9% for a variable 3.2 last December.....

[djballer]

Have you looked into refinancing into a fixed rate loan? Variable rates scare the bejesus out of me.  Even if they are low, at the trajectory you are paying them off, even a slightly higher overall interest rate that is fixed would give some peace of mind, and this is coming from someone that is a total rate watcher. 

Its been a few years since I dumped my loans, but I hear good things about SOFI.

Yeah, I recently refinanced the 165k loan with DRB with a lower rate and monthly payment than SOFI. SOFI wanted a higher rate and higher monthly payment. 5 year loan vs 10 year loan I got with DRB. I know the loan is unsecured. I will try refinancing i a year or 2.

[mattattack08]

That's a tough call.  I had a similar situation, one big loan and two smaller loans, but the interest rates on the three were pretty close to each other.  I paid off the 2 small ones a quick as possible and then upped my big loan payment.  I refinanced my loan through sofi back in Oct of last year with a variable interest rate (also tied to LIBOR rate).  The interest rate has gone up every month so far since I've had it:

10/15 (original loan rate): 3.45%
11/15: 3.48%
12/15: 3.73%
1/16: 3.93%
2/16: 3.94%

My loans original rate before refi was 6.375% so as long as is stays below that I'm all good.  I don't know how the LIBOR rate is affected by the US fed rate, but I read somewhere that the fed rate was probably gonna go up twice this year (but at very small amounts).

[Hotstreak]

Choosing the variable rate loans shows that you're pretty tolerant of risk.  How's this for a little more risk:

After maxing tax advantaged accounts, put your money in to an investment portfolio and let it grow.  Historically, the investments should grow faster than your current interest rates.  If your rates rise significantly, it's because the Fed has raised rates due to improving economy, which would mean your stocks are going to be doing pretty well, too.  Once the rates get too high to stomach, sell your investments and pay off the loans.

[Hotstreak]

That's a tough call.  I had a similar situation, one big loan and two smaller loans, but the interest rates on the three were pretty close to each other.  I paid off the 2 small ones a quick as possible and then upped my big loan payment.  I refinanced my loan through sofi back in Oct of last year with a variable interest rate (also tied to LIBOR rate).  The interest rate has gone up every month so far since I've had it:

10/15 (original loan rate): 3.45%
11/15: 3.48%
12/15: 3.73%
1/16: 3.93%
2/16: 3.94%

My loans original rate before refi was 6.375% so as long as is stays below that I'm all good.  I don't know how the LIBOR rate is affected by the US fed rate, but I read somewhere that the fed rate was probably gonna go up twice this year (but at very small amounts).

They track closely.  There's more variation in LIBOR since it can and does change with the market day to day.  Anyone with a loan tied to prime, that rate is usually around 3% above LIBOR.  This is why your LIBOR loan is +2.97% and your prime loan is +0.00% or similar.

http://www.fedprimerate.com/usprimerate-vs-libor-vs-fedfundstargetrate-chart.htm


ETA: LIBOR (London Interbank Offered Rate), very basically, is the interest banks offer for short term loans to other banks.  The Fed target rate, very basically, is the rate the federal government is willing to offer on very short term loans.  These two track since they are more or less competitors.  This is a very simplified explanation of how it works!

[tjrssibelle]

I think it depends on your job security. Ideally you could do better by putting your money in the market and trying to beat the 3.6% but if you lose your job $1900 a month is a lot to scrape together. If your job is extremely secure though or you could get another similar one if you did lose it then I'd go in this order.
1. Max 401K
2. Max Roth
3. Some split between taxable accounts and excess payments on loans.

I do intend to max out my 401k every year. I came close last year with 12k. I will not be eligible for Roth contributions this year and going forward, since I exceed the income limits. I do however, qualify to make the $5,500 max contribution for 2015. I know the deadline is 4/15/2016. I will have to act fast to do this. Thanks!

https://www.bogleheads.org/wiki/Backdoor_Roth_IRA

You can make a backdoor Roth contribution