Author Topic: Current Student Help: Pay Interest or Save?  (Read 1863 times)

RCRevolution5

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Current Student Help: Pay Interest or Save?
« on: August 24, 2016, 12:52:56 PM »
Hello everyone,

I am a professional student that has almost $58k in loans part way through my second year of school. I only take out loans for tuition and mandatory fees; after that I receive $1,200 per month for rent and living expenses. I'm projecting my loan total to be a bit over $200k, not including interest accrual throughout school.

After inspiration from MMR and other sources a few months ago, I began budgeting and I decided to throwing my extra cash towards loan payments to pay down the interest accrual. I was able to shave off $100 from my budget in June, $100 from July, and $200 in August. In addition, I deposited a bunch of cash lying around for payment, which amounted to $629. This $1,029 went to a payment on my recently disbursed, highest interest loan (6.31%). $16.83 went to interest, $1,012.17 went to principle. I currently have total interest accrual from my lower interest rate loans at $1,027.34, making me only $15.17 behind, although keeping up with additional loans for the next 2+ years will not be possible at this rate.

My question is: should I continue throwing money at the interest throughout my time in school, or would it be best to save money elsewhere?

Thank you for your time!

therethere

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Re: Current Student Help: Pay Interest or Save?
« Reply #1 on: August 24, 2016, 12:59:02 PM »
My advice? Take out less loans and get a PT job to supplement for living expenses. Its backwards to take out a loan only to repay it with the money from the loan.

If not, pay down the loan. Don't save. 200k is a ton to pay back in loans so anything you can do NOW to lower the total balance is the best path forward.

notactiveanymore

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Re: Current Student Help: Pay Interest or Save?
« Reply #2 on: August 24, 2016, 01:07:00 PM »
What do you mean by professional student? Are you in a PhD program or similar? How long is the program?

Quote
I only take out loans for tuition and mandatory fees; after that I receive $1,200 per month for rent and living expenses.

Does this mean you take out tuition + fees + $1200/month in student loans? Or does it mean you have a stipend of $1200/month from your program and you only take out student loans for tuition + fees.

Additional questions:
-Are you working while in this program, and if not, could you?
-Why don't you adjust your student loans so you don't take as much if you don't need it?
-What contributes to your $1200 expenses? Could you cut anything or live more cheaply while finishing school?
-How much money do you have saved currently? How would you handle an emergency?

RCRevolution5

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Re: Current Student Help: Pay Interest or Save?
« Reply #3 on: August 24, 2016, 01:29:37 PM »
Thank you both for your quick responses, my apologizes for the lack of clarity.

-I am in my 2nd year of dental school (4 year program). The program is quite rigorous the first two years, 7:30-4:30 most weekdays. I study during most of my free time.
-I am receiving $1,200 per month from my parents, so that is not loan money. I'm minimizing expenses so I can contribute as much of the extra cash as possible to the loan. My rent is $700/mo, which is towards the lower end in the Seattle area.
-I have almost $3k in savings that I don't touch.

LeRainDrop

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Re: Current Student Help: Pay Interest or Save?
« Reply #4 on: August 24, 2016, 01:42:12 PM »
Things may have changed since I graduated college in 2003, but I remember hearing that the interest on student loans gets capitalized upon graduation (or maybe it was 6 months after graduation), such that it becomes part of the principal upon which interest gets added after that -- essentially you'd get charged interest on the interest going forward.  Thus, the advice back then was to pay off as much interest as you can before graduating (or 6 months after?) so as to minimize the amount of interest that gets capitalized.

notactiveanymore

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Re: Current Student Help: Pay Interest or Save?
« Reply #5 on: August 25, 2016, 08:34:52 AM »
I think a balance is probably the best choice here. Think about what you need to save up for in the future and set targets for those. Maybe you've got a car that will need to be replaced before you finish school. Maybe you have expensive boards at the end of school. Maybe you need to have some buy-in amount in order to join someone's practice (or start your own).

Figure out what those numbers are and divide out how much you need to save for those things. Anything above that, throw at the loans.

The biggest factor for you getting to FI will be how you act once you graduate. If you get $140k starting out and keep your living expenses to $15k a year, you could knock out your loans in 2 years and still save some. The most important thing you can do is learn how to live frugally now and keep focused on your individual FI goals.

sisto

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Re: Current Student Help: Pay Interest or Save?
« Reply #6 on: August 25, 2016, 10:12:16 AM »
I think you are smart to pay it down as much as you can while you are still in school and taking out more loans later. I have a couple of suggestions for you.
1. Can you get a roommate to help drive down expenses more?
2. Can you get more money from your parents to help pay down the loans? Either more monthly or possibly a lump sum loan? My thought here is that after you graduate you can more than make it up to them. Wouldn't you rather pay them interest than a band etc? This may not even be an option for you, but something I was thinking might help your situation.

TexasRunner

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Re: Current Student Help: Pay Interest or Save?
« Reply #7 on: August 25, 2016, 10:27:24 AM »
That balance is higher % than any investing or savings you can find.  If there is any extra, I would throw it at the unsubsidized loans (since subsidized effectively has 0% interest for you for the next two years).  I am assuming you were able to get some subsidized, hopefully that is the case.

Sounds like your parents are very generous with helping you...  It might be worthwhile to find a considerate gift to give them in your last year as a token of thanks. (Just something to keep in mind, and my 2cents).

K-ice

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Re: Current Student Help: Pay Interest or Save?
« Reply #8 on: August 25, 2016, 10:36:25 AM »
I think the answer depends on the interest rate of the loans and especially when that interest kicks in.

IF the interest is high (>5%, or 6.31% like you said) and it kicks in from the time you borrowed the money it makes sense to pay it off sooner and borrow as little as possible.

If the interest is low (<5%) and it kicks in only after graduation than you might as well save some money in a high interest savings account.

If somehow you can borrow money from a lower interest source to pay a higher interest loan that is great.  But some scenarios are too good to be true and the great interest rate is only temporary. There is no point borrowing more money from that 6.31% loan and saving it at 2% (aside from a very small emergency fund).

If the interest is only charged after you graduate, be very disciplined and dump the saved money at the high interest loans as soon as the interest kicks in. (Can you be disciplined?)

You have a short term 2~3y until payback time so I do not think it is prudent to borrow more than you need and "invest".