Case Study - Student Loan Payoff Strategy

[SantaFeSteve]

Greetings,

I have been struggling to find the best method for paying off my student loan debt.  I have 10 loans that are currently being serviced as a single payment.  The loans are all fixed at a 6.55% interest.  The loans were set for a 25 year repayment period where any remaining balance at the end of the term will be forgiven.  The remaining term is 271 months.  The balances and payments are listed below:

Loan                    Balance          Monthly Payment
Sub loan 4     $633.65      $3.59
Sub loan 3    $1,251.35     $7.08
Sub loan 1    $1,970.25     $11.16
Sub loan 5    $3,003.25     $17.00
Sub loan 10    $5,954.61     $33.71
Sub loan 9    $7,064.11     $39.98
Sub loan 2    $7,257.77     $41.09
Sub loan 8    $7,271.38     $41.16
Sub loan 7    $7,553.42     $42.75
Sub loan 6    $24,356.94     $137.87

Total                 $66,316.73      $375.39

I currently have $10,000 that I will be paying onto this debt. Then an additional $1,000 per month will be going to principal reduction, plus whatever portion of the current monthly payment is eliminated as I pay off specific loans.

What is the right approach?  I am having a difficult time finding an online calculator that will work with the loan setup since they all seem to be assuming a fully amortized loan term.  Because they are all the same interest rate, and also the same terms, I am struggling to be able to quantify the best approach.

My initial thoughts:
Use the $10,000 and my first $1,000 in principal reduction to pay off sub loans 4, 3, 1, and 10.  This will eliminate $61.81 in monthly payment which will then be added to the principal reduction payments.  Then I would focus the principal reduction on the loans starting with the smallest and adding the monthly payment of that loan to principal reduction as the loan is eliminated. 

But,
should I be paying off the largest loan first? Or should I have my additional principal payments distributed among all of the loans, thereby increasing the portion of each regular payment that goes to principal?

Thanks for your help,

Steve

[shotgunwilly]

Since they are all the same %, it does not matter which you pay first.  I think your idea is good and is what i would do.  Eliminate all of the smallest, then add those minimum payments that were eliminated, to the next lowest and continue on.

[BMEPhDinCO]

Loan                    Balance          Monthly Payment
Sub loan 4     $633.65      $3.59
Sub loan 3    $1,251.35     $7.08
Sub loan 1    $1,970.25     $11.16
Sub loan 5    $3,003.25     $17.00
Sub loan 10    $5,954.61     $33.71
Sub loan 9    $7,064.11     $39.98
Sub loan 2    $7,257.77     $41.09
Sub loan 8    $7,271.38     $41.16
Sub loan 7    $7,553.42     $42.75
Sub loan 6    $24,356.94     $137.87

Total                 $66,316.73      $375.39

I would kill off:

subloan 4, 3, 1, 5 immediately - then over the three months following, add in subloan 10.  After that, loans 9, 2, 8, 7 are pretty much exactly the same, just pick on to attack and then 7 months later, pick another - in 1 year, you can kill all except 2, 8, 7 and 6.  That makes it a lot easier to deal with.

[Spondulix]

When the rates are the same, then you're really just getting into psychology. Would you rather see that big loan go down, or see that 10 loan number go down?

Personally, I like seeing progress, so I'd be starting low and going high. Have you started a journal on here? If not, that's a great way to document your progress and get some encouragement.

[SantaFeSteve]

One critical question I have is related to calculating the loan amortization.  Thinking of a mortgage, a small, additional principal reduction payment made early in the life of the loan will save a large amount of interest over the life of the loan.  Therefore I am trying to figure out if making some attempt at paying down the principal amount, especially on the largest loan, will help minimize the amount of interest I pay over the life of the loan.  Granted, I only intend for this to take about 3 years (maximum) and so maybe with that short timeframe it will not really matter. 

Thanks for the comments so far!

[Spondulix]

Edit: Extra principal payments on mortgages work differently than student loans. A student loan is a simple loan (so any payment is required to go to interest first, then principal). Mortgage you can send an extra payment that can bypass interest and go straight to principal.

I don't think there's a way to get ahead on this one. When the interest rate is the same for all of them, it doesn't matter if you're paying it in 10 separate payments or 1 cause it's about the total. The accrued interest at the end of the month (on the remaining balance) will be the same no matter how you slice or dice it.

In other words, if the total is $24,000, you'll be accruing $1560 in interest this month; next month the total will be $23,000 with $1,495 interest accrued. You could have put that $1k towards loan 1 or 10, but at the end of the day, the total will be the same.

When you read about snowballing and the different types of loan payoff techniques, those really apply when your interest rates are different. If you're feeling brave, maybe try a 0 interest (or low interest) credit card. That came up on a thread recently. Or, if you're looking to buy a house in the next few years and can get a lower interest rate, see if you can take out extra...

[Indy007]

I was in a similar situation where I had multiple loans all at the same interest rate. Since it didn't matter from a financial perspective where to direct the funds, I took the approach of paying off the smallest loans first and then working my way up. It was definitely a good motivator to see the number of loans going down by paying off the smallest ones first.

This strategy also has the benefit of reducing the required minimum monthly payment when you knock off the smaller ones, which could be useful if cashflow ever became an issue.

[SantaFeSteve]

@ Spondulix - That's the piece I was missing, simple vs compounding.
@Indy007 - Thanks for that clarification also.

I think I will be moving ahead by using the $10,000 to pay off loans 4, 1, 7 (total $10, 157).  This will free up $57.50 moving forward.  Then #3 will disappear next month increasing my debt reduction payments by another $7.08 for a total additional principal reduction payment of $64.58 each month. 
I will then just work my way through the loans from small to large.

Thanks for helping me get my head wrapped around this.  Sometimes I just think a little too hard. 

[Spondulix]

Not thinking too hard - trying to find a way to get ahead and work the system. It's very Mustachian, IMO. :)