Author Topic: How quickly to pay off student loans  (Read 5397 times)

B L I S S

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How quickly to pay off student loans
« on: April 29, 2014, 10:38:14 PM »
My student loan total when I graduate will be $15,000. The interest rate will be 6.8%. I've calculated the total interest over the life of the loan and the monthly payments for 5 different scenarios (length of loan payment period of 1-5 years). It seems that every additional year I take to pay loans will incur about $540 in interest expense over the life of the loan. The monthly payment drops significantly at first, but that decreases at a decreasing rate.

Loan Length (Yrs)   Total Interest Paid  Monthly PMT
1                            $558.2                  $1,296.5
2                            $1,085.5               $670.2
3                            $1,624.3               $461.8
4                            $2,175.6               $357.8
5                            $2,736.3               $295.6

My after tax monthly income will be roughly $3,400. Given these numbers, how quickly would you pay off the loans?

MDM

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Re: How quickly to pay off student loans
« Reply #1 on: April 29, 2014, 11:14:33 PM »
Just talking round numbers: assume you can live on $2,000/mo.  That leaves $1400/mo for investing, so you can be student loan debt free in ~11 months.

That would be a decent base case.  What alternatives (e.g., 401K - with and without employer match; IRAs, etc.) are you contemplating?

greaper007

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Re: How quickly to pay off student loans
« Reply #2 on: April 30, 2014, 01:05:32 AM »
6.8% interest, whoa.    Here's what I would do, have done.    Balance transfer all that junk to a zero percent credit card and just attack it as fast as you can.   You'll probably have to do a couple balance transfers, and pay the associated fee, but you'll come ahead in the long run with interest.

I've never had a loan over 3% by using credit cards.

Now, the companies won't outright balance transfer a federal loan.   So here's the trick.   You just ask them to send you a check that you use to pay off the loan, just don't tell them what it's for.   Also, ask for a longer payment period for the zero percent when you talk to them, sometimes there's deals that aren't advertised.

B L I S S

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Re: How quickly to pay off student loans
« Reply #3 on: April 30, 2014, 05:41:40 AM »
Just talking round numbers: assume you can live on $2,000/mo.  That leaves $1400/mo for investing, so you can be student loan debt free in ~11 months.

That would be a decent base case.  What alternatives (e.g., 401K - with and without employer match; IRAs, etc.) are you contemplating?

That $3,400 is after contributing to the 401K with an employee match. I'm dropping $5k into the Roth IRA, that's already included too. Do you think it's worth spending $600 more a month to save $500 in total interest? I feel like if I had that extra $600 a month the first year I could bring in about $6-800 through investments. Here's the total I can save per year as monthly student loan PMTs change

Loan Length (Yrs)   Total Savings per year
1                            $22,119.8
2                            $29,629.4
3                            $32,130.2
4                            $33,378.2                         
5                            $34,124.6         

---------
6.8% interest, whoa.    Here's what I would do, have done.    Balance transfer all that junk to a zero percent credit card and just attack it as fast as you can.   You'll probably have to do a couple balance transfers, and pay the associated fee, but you'll come ahead in the long run with interest.

I've never had a loan over 3% by using credit cards.

Now, the companies won't outright balance transfer a federal loan.   So here's the trick.   You just ask them to send you a check that you use to pay off the loan, just don't tell them what it's for.   Also, ask for a longer payment period for the zero percent when you talk to them, sometimes there's deals that aren't advertised.

Sounds like a good idea for the last year of the loan. But what does the underlined mean? A credit card company will send you a check for any amount up to your credit limit? Interesting, but why would they do that?

Weedy Acres

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Re: How quickly to pay off student loans
« Reply #4 on: April 30, 2014, 05:51:45 AM »
I'd dump every last penny I had on the loans and knock them out as quickly as possible.  That's a 6.8% guaranteed return.  I wouldn't give that up for the potential to have at best a couple hundred more dollars at the end of the day.  Not worth the mental clutter of debt.

dude

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Re: How quickly to pay off student loans
« Reply #5 on: April 30, 2014, 06:17:23 AM »
Oh shit man, in your situation, with you already saving AND having enough to live on and kill that student loan bill in a year -- no question I'd suck it up and eat ramen for a year if I had to in order to vanquish that student loan!

matchewed

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Re: How quickly to pay off student loans
« Reply #6 on: April 30, 2014, 06:23:27 AM »
Just talking round numbers: assume you can live on $2,000/mo.  That leaves $1400/mo for investing, so you can be student loan debt free in ~11 months.

That would be a decent base case.  What alternatives (e.g., 401K - with and without employer match; IRAs, etc.) are you contemplating?

That $3,400 is after contributing to the 401K with an employee match. I'm dropping $5k into the Roth IRA, that's already included too. Do you think it's worth spending $600 more a month to save $500 in total interest? I feel like if I had that extra $600 a month the first year I could bring in about $6-800 through investments. Here's the total I can save per year as monthly student loan PMTs change

Loan Length (Yrs)   Total Savings per year
1                            $22,119.8
2                            $29,629.4
3                            $32,130.2
4                            $33,378.2                         
5                            $34,124.6         

---------
6.8% interest, whoa.    Here's what I would do, have done.    Balance transfer all that junk to a zero percent credit card and just attack it as fast as you can.   You'll probably have to do a couple balance transfers, and pay the associated fee, but you'll come ahead in the long run with interest.

I've never had a loan over 3% by using credit cards.

Now, the companies won't outright balance transfer a federal loan.   So here's the trick.   You just ask them to send you a check that you use to pay off the loan, just don't tell them what it's for.   Also, ask for a longer payment period for the zero percent when you talk to them, sometimes there's deals that aren't advertised.

Sounds like a good idea for the last year of the loan. But what does the underlined mean? A credit card company will send you a check for any amount up to your credit limit? Interesting, but why would they do that?

Bolded for emphasis.

You think you're going to get an 11% return? You really are optimistic. Consider that on average the total market can return about 7% after inflation your payment on the loan is a guaranteed amount nearly identical to it. Outside of 401k contributions you should hammer at your loans until they are gone. Just my take.

randymarsh

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Re: How quickly to pay off student loans
« Reply #7 on: April 30, 2014, 06:41:05 AM »
You just ask them to send you a check that you use to pay off the loan, just don't tell them what it's for. 

No need to be secretive, I know Discover advertises on the checks they send me "Use these for paying off high interest balances, vacations, or consolidating debt such as car or student loans, etc."

warfreak2

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Re: How quickly to pay off student loans
« Reply #8 on: April 30, 2014, 06:47:35 AM »
You think you're going to get an 11% return? You really are optimistic. Consider that on average the total market can return about 7% after inflation your payment on the loan is a guaranteed amount nearly identical to it.
7% after inflation is not "nearly identical" to 6.8% before inflation. Before inflation, 11%/year is quite typical for long-term stock market returns:


Now, I'd take a guaranteed 7% over a risky 11%, and I think most on this forum would advise the same. But it depends on your risk tolerance.
« Last Edit: April 30, 2014, 06:50:15 AM by warfreak2 »

matchewed

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Re: How quickly to pay off student loans
« Reply #9 on: April 30, 2014, 07:04:21 AM »
You think you're going to get an 11% return? You really are optimistic. Consider that on average the total market can return about 7% after inflation your payment on the loan is a guaranteed amount nearly identical to it.
7% after inflation is not "nearly identical" to 6.8% before inflation. Before inflation, 11%/year is quite typical for long-term stock market returns:


Now, I'd take a guaranteed 7% over a risky 11%, and I think most on this forum would advise the same. But it depends on your risk tolerance.

Assuming the loan is fixed there is no before or after inflation for the 6.8% it is just 6.8%. So yes 7% after inflation is nearly identical to 6.8%. For a future anticipated return you'd do an inflation adjustment if you are looking at today dollars. When you need to compare that against your loan payment you don't look at inflation with your loan payment as inflation doesn't affect your loan payment but it does affect your long term returns.

Thegoblinchief

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Re: How quickly to pay off student loans
« Reply #10 on: April 30, 2014, 07:17:40 AM »
My personal threshold for investing versus paying a loan is 5%

Since you're already taking advantage of all the special tax buckets, I'd kill the loan off as fast as you desire.

warfreak2

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Re: How quickly to pay off student loans
« Reply #11 on: April 30, 2014, 07:21:20 AM »
Assuming the loan is fixed there is no before or after inflation for the 6.8% it is just 6.8%.
Uh, what? If the choice is between paying it off today in today's dollars, or paying it off next year in next year's dollars, then obviously inflation matters. Paying off a 6.8% fixed rate loan is equivalent to investing with a guaranteed 6.8% return, before inflation.

matchewed

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Re: How quickly to pay off student loans
« Reply #12 on: April 30, 2014, 07:44:16 AM »
Assuming the loan is fixed there is no before or after inflation for the 6.8% it is just 6.8%.
Uh, what? If the choice is between paying it off today in today's dollars, or paying it off next year in next year's dollars, then obviously inflation matters. Paying off a 6.8% fixed rate loan is equivalent to investing with a guaranteed 6.8% return, before inflation.

You're right. I made a mistake with my reasoning.


B L I S S

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Re: How quickly to pay off student loans
« Reply #13 on: April 30, 2014, 07:55:02 AM »
My entire strategy is dependent one one piece of information from Reply #2.


Two-Year Plan
Choose a two-year loan payment plan. Thatís monthly payments of $670. That would mean over the two years I would pay total interest of $1,085 however at month 6, with 18 months left on the loan, I transfer it to Discover it or Citi Preferred card with 0% APR for 18 months. I donít know if using the check method from post #3 incurs any fee so Iíll assume that it does incur a fee of 5%. That results in a fee of  $571. Remaining interest would have been $765. Saved $194 if there is a fee, $765 if there is not. To pay off the remaining $11,438 Iíll only need to pay $635. Total costs are
First 6 months: $670*6 = $4,020
Last 18 months: $636*18 = $11,438 (+fee of $571)
Total: $15,458 (or $16,029) over 2 years


One-year Plan
Choose a one-year loan payment plan. Thatís monthly payments of $1,296.5. That would mean over the year I will pay total interest of $558. If I transfer it to Discover it or Citi Preferred card with 0% APR for 18 months Iíll assume that it does incur the balance transfer fee of 5%. That results in a fee of  $750. That option is off the table. If there is no fee, I can spread my $15,000 payments over 18 months rather than 3, dropping monthly payments from $1,296.5 to $833. Total costs are
12 months: $1,296.5*12 = $15,558 or
18 months: $833*18 = $15,000 (with no fee)


So I have a choice of paying $15,000 | $15,458 | $15,558 | and $16,029
To be honest, I like option - two years if there's no fee because I will be less strapped for cash.
The key from reply 2 is if that check comes with a fee or not.

Unless you all see something that I'm missing.

fljason

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Re: How quickly to pay off student loans
« Reply #14 on: April 30, 2014, 08:10:06 AM »
I am in the same boat just a  little ahead of you. I had 17,000 of student loan @ 6.8% I was bringing home about 2,600 dollars a month and could live off of 1000 monthly budget. for the past 8 months I have thrown 1500 at the loan, leaving 100 to add to my savings or a plane ticket home.

my advice is that you can pay this loan off in one year. throw as much money as you can at it especially if your investments are already covered.

homeymomma

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Re: How quickly to pay off student loans
« Reply #15 on: April 30, 2014, 08:16:10 AM »
I agree with all the above! Pay them off ASAP! Since your rate is so high it's a no-brainer. I'd put myself on the most aggressive schedule you can handle, and also throw any surplus and windfalls at them and you'll be done super fast. I just finished doing this with about 30K in loans and being done feels amazing. Totally worth it!

greaper007

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Re: How quickly to pay off student loans
« Reply #16 on: April 30, 2014, 08:22:47 AM »
Sounds like a good idea for the last year of the loan. But what does the underlined mean? A credit card company will send you a check for any amount up to your credit limit? Interesting, but why would they do that?

I don't think they can officially pay off some debts.   But they can give you money to pay them off.   Normally this would come with an enormous cash advance fee, but if it's through a promotional balance transfer they'll just wire money into your account or send you a check if you ask, without charging the 25% cash advance fee.

We even used this once to make payroll when money was really tight at the beginning of our business.

B L I S S

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Re: How quickly to pay off student loans
« Reply #17 on: May 01, 2014, 07:30:26 AM »
IT turns out Sallie Mae saw me coming a mile away, can't pay student loans in one lump payment with a credit card. I'm more than likely going to take everyone's advice and just pay it off in one year; there's only an advantage in choosing a two year payment plan if I can guarantee I'll do >9% in the market, which isn't difficult, but still only puts me a couple hundred over unless I do something like 25% lol.

greaper007

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Re: How quickly to pay off student loans
« Reply #18 on: May 01, 2014, 07:55:32 AM »
IT turns out Sallie Mae saw me coming a mile away, can't pay student loans in one lump payment with a credit card. I'm more than likely going to take everyone's advice and just pay it off in one year; there's only an advantage in choosing a two year payment plan if I can guarantee I'll do >9% in the market, which isn't difficult, but still only puts me a couple hundred over unless I do something like 25% lol.

It's sort of nuanced.  You don't pay it off with the credit card itself.    Use a low percentage or 0 percent balance transfer offer.     First, get an exact payoff amount from sallies mae.    Then call the credit card company and ask for the balance transfer, when they ask what credit card you want the balance transfer to come from, ask them to send you a check for whatever your payoff amount is and that you'll just payoff the card yourself.

Then, take that check and pay sallie Mae off with the exact amount with a check, not your credit card.

This method has two advantages.     One, you have a considerably lower interest rate and the fact that it's for a short period gives you an incentive to pay off early.

Two, if something horrible happens in your life and you're forced to declare bankruptcy, credit cards get erased but student loans don't.    It's nice knowing that there's an exit strategy that let's you start over.