Author Topic: Student loan question  (Read 6089 times)

Hedge_87

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Student loan question
« on: September 24, 2013, 03:02:17 PM »
I have no student loans. It was not hard for me to grasp how a little bit of money today x interest = a lot of money paid back in the future. However I am getting married next June and my fiancÚ just finished her masters degree. We are on the same page about getting her student loans paid of as quickly as possible (with our combined incomes we are looking at 12-15 months). That is as long as we don't increase or spending which is approx $2500 a month. To help us stay on track I was wondering if anybody new of a calculator that would show me how much interest we are getting hit with on a day to day basis. I have never really had any debt except for an ill advised car loan my parents signed me up for (to help me build credit and learn how to manage payments thanks a lot mom and dad lol) when I was in high school. I just want to know the interest to help ring home the ramifications that having this debt over heads will have on our financial goals.

Student loans = $60k
Interest= 6.8%

Also as a side note I was wondering what you all thought about possibly refinancing the house to pay of the loans and get the interest down to a more reasonable level. Currently owe about $25k and the house and land is worth about $90k.
Thank you in advance for any help

SunshineGirl

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Re: Student loan question
« Reply #1 on: September 24, 2013, 03:10:25 PM »
I use bankrate's calculators sometimes.

Since you can get the loans paid off in 12-15 months, look carefully at whether the fees from a refinance would cancel out your savings. The interest you'd be paying for 12 months would come to less than $5K, so it may not be worth it if you have to pay for an appraisal and origination fee, etc.

Kristin

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Re: Student loan question
« Reply #2 on: September 24, 2013, 03:27:00 PM »
Refinancing may not be worth paying off the student loans if you are able to pay them off as is in 12-15 months.
There are almost always closing costs involved with refinancing a mortgage, and a lot of headache.  Although, if you have equity in the home, it may be worth looking into to getting approved for a home equity line of credit (only if you will save significantly on the interest rate vs. 6.8%) to pay off the loan.  It is typically faster to get approved and get the funds from an equity line than refinancing the entire mortgage.  You can always close it once the balance is paid off, or keep it for a super emergency backup fund.

Hope this helps!

ioseftavi

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Re: Student loan question
« Reply #3 on: September 24, 2013, 04:15:38 PM »
Interest rates are given on an annual basis so you just need to divide the interest rate by how small fo a time period your looking for and multiply by the current balance

Current Balance X interest rate / period of time

For daily interest charges on her loans:
$60,000 x .068/365 = $11.18

I use this method too because that number right there makes me want to get rid of all my debt ASAP

Went to type this, saw Maigahane had done it.  This is correct. 

This is an excellent formula to know offhand and use in your daily life.  For us, we use it to see how we're doing as we continue punching my fiancee's student loans IN THE FRIGGIN' FACE. 

When we started out, loans where accruing interest at:
$23.63/day OR $708.90/month OR $8,507/year

Through massive focus and use of proper snowballing techniques, loans are currently accruing interest at:
$14.45/day OR $433.50/month OR $5,202/year.

Not bad, for 10 months work!  Granted, we are two people who are putting massive amounts towards these loans. 

I strongly suggest you commit this formula to memory and use it in conjunction with snowballing.  Moving the needle even a little bit (i.e. $1 less in accrued interest per day) is a tremendous accomplishment, and you should feel awesome when you see progress.

Hedge_87

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Re: Student loan question
« Reply #4 on: September 24, 2013, 08:41:24 PM »
Thanks every body for the replies. I kind of figured the whole current balance x interest / time was right but $11.18 a day holy frigging crap that's some jack (more than any other expense I have when broke down to cost per day)!!! I thought my math might have been off. I never have done the math before just always had a gut feeling that owing anybody for anything was not good so I did everything in my power to avoid it.

Hedge_87

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Re: Student loan question
« Reply #5 on: September 25, 2013, 08:12:26 AM »
Thanks again for all the help. I'm a very visual person and being able to see the interest broke down will be a great motivator for us to get this paid down ASAP. Being able to set goals and have a common direction defiantly helps me keep on track. My fiancÚ and I have grown a lot closer every time we set goals to work together on wether it be a financial or health goal or any other thing. We even make some little chalenges between us since we are both fairly competitive.

ioseftavi

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Re: Student loan question
« Reply #6 on: September 25, 2013, 09:10:05 AM »
Thanks again for all the help. I'm a very visual person and being able to see the interest broke down will be a great motivator for us to get this paid down ASAP. Being able to set goals and have a common direction defiantly helps me keep on track.

Yup!  It helps for me for the same reasons.  A simple way to think of it is that any payments you make towards reducing the principal will get an IRR equivalent to the interest rate on the loan.  So if you have a choice between adding to an asset growing at 0.5% (i.e. a savings account) or reducing a liability growing at 6.8%, reducing the liability is going to grow your networth far more than adding to your piddling checking account (obviously, make sure you've got some emergency cash, though!).

My fiancÚ and I have grown a lot closer every time we set goals to work together on wether it be a financial or health goal or any other thing. We even make some little chalenges between us since we are both fairly competitive.

Seriously this will sound so weird to non-financial types but yes, I have found this to be true.  My fiancee and I are completely on the same page with our goals, and it makes things so nice to be able to talk about finances openly and without judgement.  It's just like we're two people trying to tackle a goal together - there's never blame or judgment or weirdness.  Every time we make progress, we get really excited about it and re-do our spreadsheets, talk about how far we've come, etc.  It's much nicer (not to mention, easier) to make this journey with a companion, I think.

willn

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Re: Student loan question
« Reply #7 on: September 25, 2013, 12:57:38 PM »
Also as a side note I was wondering what you all thought about possibly refinancing the house to pay of the loans and get the interest down to a more reasonable level. Currently owe about $25k and the house and land is worth about $90k.
Thank you in advance for any help

Quick comment, don't do this. In general you want to avoid converting an unsecured loan to a secured loan.  Even if it works mathematically because of the effective interest rates difference, there are some aspects of most student loan contracts that, while rarely relevant, become useful when needed--like, if the borrow dies, the debt is erased.  Not so with the mortgage.

Trip

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Re: Student loan question
« Reply #8 on: September 25, 2013, 02:34:21 PM »
Interest rates are given on an annual basis so you just need to divide the interest rate by how small fo a time period your looking for and multiply by the current balance

Current Balance X interest rate / period of time

For daily interest charges on her loans:
$60,000 x .068/365 = $11.18

I use this method too because that number right there makes me want to get rid of all my debt ASAP


Although this is a great tool to use, this number can be a little misleading since this is an amortized loan.  Specifically, this will show how much interest adds up every day assuming the OP only pays off the interest.  However, this daily rate will actually go down every time a payment is made.

Using the formula above it makes it look like the total interest paid for 12 months would be $11.18 * 365 days = $4080.70.

But in actuality, the total interest paid if paying off the loan in 12 months would be about $2232.89  ($2755.86 if paid off in 15 months)  *These both assume equal payments are made every month

Note:  I am not trying to start an argument, I only show these numbers to remind all readers the benefit of throwing extra payments at the principal as early and often as possible.

HappyHoya

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Re: Student loan question
« Reply #9 on: September 26, 2013, 07:38:32 AM »
You should check out a service called Student Loan Hero. You (securely) link your debt into their service, and they provide the best user interface (IMO) for paying down student loans, as well as great advice (not quite Mustachian, but in that general spirit) for paying off the debt. I really appreciated the monthly, weekly, monthly breakdown features and also the way it encourages you to pay back as much as you can by visualizing how much extra payments buy you in terms of "time to freedom."

Trip

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Re: Student loan question
« Reply #10 on: September 26, 2013, 10:19:24 AM »
Interest rates are given on an annual basis so you just need to divide the interest rate by how small fo a time period your looking for and multiply by the current balance

Current Balance X interest rate / period of time

For daily interest charges on her loans:
$60,000 x .068/365 = $11.18

I use this method too because that number right there makes me want to get rid of all my debt ASAP


Although this is a great tool to use, this number can be a little misleading since this is an amortized loan.  Specifically, this will show how much interest adds up every day assuming the OP only pays off the interest.  However, this daily rate will actually go down every time a payment is made.

Using the formula above it makes it look like the total interest paid for 12 months would be $11.18 * 365 days = $4080.70.

But in actuality, the total interest paid if paying off the loan in 12 months would be about $2232.89  ($2755.86 if paid off in 15 months)  *These both assume equal payments are made every month

Note:  I am not trying to start an argument, I only show these numbers to remind all readers the benefit of throwing extra payments at the principal as early and often as possible.
Well hell, if they want an amortization schedule I can walk them through how to set one up in excel and how to account for making extra payments :) I'm an accountant that loves excel. I have amortization schedules for my mortgage and student loans laid out in my budgeting spreadsheet (as well as a comparrison of how much better off I am with my refi from a 30 to 15 year mortgage).
I just simplifed it because it shows that as of now this is how much my debt is costing me without taking time to do some more complex math. Also why I threw is my second comment about using the formula to see how much an extra payment saves you in interest. If you start getting into amortization schedules a lot of people's eyes glaze over :D
I work in Finance, so I'm totally with you on excel.  Most people's eyes might glaze over, but mine tend to glisten ;)

Hedge_87

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Re: Student loan question
« Reply #11 on: September 26, 2013, 12:24:50 PM »
I would deffinetly be interested in an excel formula although I will warn you I am not very good at excel. I took a class in high school but I've slept since then. I'm good at following directions though :)