Federal Unsub loans - graduating soon

[kimmarg]

My spouse and I have approx $50,000 in unsubsidized federal student loans (US) accrued over the past 3 year while my spouse attended graduate school.  Currently that includes appprox $47,000 in principle and $3,000 in interest. The principle is spread amongst 6 different loans (2 per year for the past 3 years) with interest rates of 5.21% and 6.21%.  Graduation is in May. It is my understanding that the interest will capitalize onto the loans once you are no longer in school.  I have approx $3000 in federal tax refund which just arrived. Should I

a) pay the interest only on all the loans before it captializes in May
b) make a $3000 principal payment on the loan with the highest interest rate
c) save the $3000 and use it to make the first few months of loan payments while the student looks for a job
d) other

Thanks!

[TreesBikesLove]

Congratulations to your spouse! I hope the graduate degree helps them get a job they love and was worth the investment. Mandatory loan repayments will start 6 months after graduation. I suggest paying off those loans ASAP. Student debt is an emergency.

[Ebrat]

If you pay the interest to avoid it capitalizing, you're leaving more principal to pay interest on, so the next effect is the same. For example (using made up numbers):

Loan 1: $10,000 principal + $1,000 interest
Loan 2: $20,000 principal + $2,000 interest

Pay off the $3,000 in interest, and you're left with $30,000 that will be charged interest. Pay off $1,000 in interest plus $2,000 in principal on Loan 1, and you're left with $30,000 that will be charged interest ($8,000 remaining principal on Loan 1, $20,000 principal on loan 2, and $2,000 capitalized interest on Loan 2).

So my recommendation would be to put it toward the highest interest loan, assuming you anticipate being able to make the payments when they start in November. Also, I'd adjust your withholdings so you don't get such a big refund next year :)

[kimmarg]

If you pay the interest to avoid it capitalizing, you're leaving more principal to pay interest on, so the next effect is the same. For example (using made up numbers):

Loan 1: $10,000 principal + $1,000 interest
Loan 2: $20,000 principal + $2,000 interest

Pay off the $3,000 in interest, and you're left with $30,000 that will be charged interest. Pay off $1,000 in interest plus $2,000 in principal on Loan 1, and you're left with $30,000 that will be charged interest ($8,000 remaining principal on Loan 1, $20,000 principal on loan 2, and $2,000 capitalized interest on Loan 2).

So my recommendation would be to put it toward the highest interest loan, assuming you anticipate being able to make the payments when they start in November. Also, I'd adjust your withholdings so you don't get such a big refund next year :)

Thank you, that clarifies things. In my head somehow the interest capitalizing was this horrible thing. I think we'll just go ahead and put the payment on the highest interest rate loan.  We did make a principle payment on one of the loans last year too.   I'm not too worried about making the payments in 6 months. Plan is to put 100% of teh new salary on the loan. If there's no job by then (unlikely) we will not need $900/month in daycare if we have one person not working so either way we will have the money.

Given we'll become two incomes I'm not sure how to change the widholding to work out with no idea of the second income. $2000 of the refund was the student credit so that will go away. Last year I used the IRS calculator and got that I needed 20 exemptions. I chickened out putting that in when all my coworkers said that must be wrong.

[kimmarg]

Congratulations to your spouse! I hope the graduate degree helps them get a job they love and was worth the investment.

So do I!! We have a deal though. No running off to join the circus until the loans are paid off...gotta stick with this career at least that long! ;)