Author Topic: How would you approach this debt?  (Read 6442 times)

anastrophe

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How would you approach this debt?
« on: March 04, 2013, 09:36:40 AM »
I'm super lucky to be engaged to a wonderful person, who unfortunately has not-very-wonderful student loan debt. All of this was acquired before we met, and my partner has excellent saving habits now. But as I approach debt-free life myself, I find myself panicking about being in a relationship with someone who has debt that far exceeds anything I ever had.

Here are the details:

   Balance   Interest rate   Minimum Daily interest
1   $6,706.43    3.25%   $38.59    $0.60
2   $6,740.12    3.25%   $50.00    $0.60
3   $7,077.77    4.25%   $44.43    $0.82
4   $24,512.44    4.50%   $156.89    $3.02
5   $7,314.74    4.75%   $47.91    $0.95
6   $19,260.52    5.25%   $131.36    $2.77
7   $2,727.33    5.25%   (not sure)   $0.39
8   $2,942.27    6.55%   $60.90    $0.53
            
The minimum payments are over $500, but we try to pay at least $600 each month. Still, the principal isn't decreasing much, the daily interest accrues more than $9/day (more than our daily food budget!), and most of these are variable rate loans which worries me. We don't have much extra money to throw at it (working on increasing income, but we're not there yet) but I could probably chip in more than I have been out of my own savings. Should I? How would you approach repayment on this debt, with a combined income of $56,000/year? Any tips for sleeping better would also be appreciated.
« Last Edit: March 04, 2013, 09:41:28 AM by anastrophe »

mpbaker22

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Re: How would you approach this debt?
« Reply #1 on: March 04, 2013, 09:50:02 AM »
I'm not trying to worry you, but paying off the minimums will take your about 20 years to pay off.  If you could get to $800/month, you could pay it off in 10 years, and $1,000/month gets it down to 7-8 years. (and this assumes paying down evenly without strategy).

Strategically, pay off the 6.55% then the 5.25% loans.  They're also the smallest, so you can get rid of them entirely very quickly.  The only qualifier, in my mind, is which loans are variable?  If the 3.25 is variable and it can go up to (just for example) 10%, maybe it's worth it to pay a little more to that loan.

Just realize that this will be a long and slow process, but it will get done in time.  Anything easy isn't worth doing, right?

Owl

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Re: How would you approach this debt?
« Reply #2 on: March 04, 2013, 09:54:01 AM »
I'd knock out debt #8 first, then #7. (Focus on highest interest rates first).
Are these debts federal loans? What repayment plan is she on?
These debts are about 70,000 total, which you should definitely be able to pay off with your incomes - is there another area you can save, so you can dedicate more than $600 a month? Half of that is just going to interest.

anastrophe

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Re: How would you approach this debt?
« Reply #3 on: March 04, 2013, 09:56:44 AM »
The only qualifier, in my mind, is which loans are variable?

If it changes anyone's advice, the fixed rate loans are #2 and #8 (the 6.55% one). Those are the only federal loans. The rest are variable and through Sallie Mae.

BayIslandSaver

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Re: How would you approach this debt?
« Reply #4 on: March 04, 2013, 11:24:28 AM »
I was in a similar situation as anastrophe.  Close to 70K-75K in student loans.
Like others have mentioned, pay off the highest interest loans first.  I don't assume rates will go up rapidly or at all in the next 1-2 years.

One of the first things we did was create a spreadsheet that evaluates our spending and made reasonable estimates on future spending (2-3 months in advance).  This way, I don't have extra cash sitting in our checking account.  I left a small cushion of cash for unexpected circumstances.

Try using Mint or similar to track your spending and get it down.
This might be a little overboard, but every time I would make an 'discretionary' purchase, I would question whether or not it's worth paying the 5-6%/yr interest.

It's been about 2 years are we got the debt down into the 20K range.
We were already considered frugal, but MMM put us at another level.

Love this site!

MrsStubble

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Re: How would you approach this debt?
« Reply #5 on: March 05, 2013, 08:33:01 AM »
Wow, i feel for you! When my husband and I got together the roles were reversed,  I was knee-deep in debt and he was debt-free but we got it all tackled in 2-3 years together and I learned my lesson.  I'd also knock out #7 & 8 first if possible. Not only b/c they are high rates (even if one if fixed) but because knocking the little ones out will help free up some cash to put towards the other debts (and the snowball begins).  Do you have any options to consolidate these or transfer something to a 0% something? 

Also, not sure if you have this issue but I had a loan with Sallie Mae once and this applied to me.  Many student loan companies automatically put the loan in pay it forward status by default meaning that if you pay extra, it goes to next months payment and not towards paying down the principal.  So if you haven't yet, I'd call the loan providers and make sure you don't have pay it forward status on any of the accounts. If you do, you usually need to send a letter in writing to them to remove it.  Tricky jerks! 

Good Luck!

eriksonr

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Re: How would you approach this debt?
« Reply #6 on: March 05, 2013, 10:21:05 AM »

Wow, i feel for you! When my husband and I got together the roles were reversed,  I was knee-deep in debt and he was debt-free but we got it all tackled in 2-3 years together and I learned my lesson.  I'd also knock out #7 & 8 first if possible. Not only b/c they are high rates (even if one if fixed) but because knocking the little ones out will help free up some cash to put towards the other debts (and the snowball begins).  Do you have any options to consolidate these or transfer something to a 0% something? 

Also, not sure if you have this issue but I had a loan with Sallie Mae once and this applied to me.  Many student loan companies automatically put the loan in pay it forward status by default meaning that if you pay extra, it goes to next months payment and not towards paying down the principal.  So if you haven't yet, I'd call the loan providers and make sure you don't have pay it forward status on any of the accounts. If you do, you usually need to send a letter in writing to them to remove it.  Tricky jerks! 

Good Luck!

I'm in a similar situation with loans.  But, why the big deal about not advancing the next monthly payment?  It seems it will take a high savings rate to aggressively attack the loan.  In the event an unexpected life event happens, if the payment date is advanced one can stop paying for a month or two to rebuild and emergency fund.  It's a built in deferment.  Regardless of whether the extra amount is applied to the principle or the next month's payment, the funds are applied the same to interest and then principle.  It's just a matter of continuing to make the payment even when it's not due. 

Kazimieras

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Re: How would you approach this debt?
« Reply #7 on: March 05, 2013, 10:26:46 AM »
If you can consolidate the loans into a lower rate, do so. Otherwise take one of two approaches:

1 - the ideal way to take the highest interest rate debt and tackle it first. Pay the minimum on everything and dump as much money as you can on the high interest rate loan.

2 - If you need motivation, tackle the smallest debt first to gain some momentum, then take the approach listed in #1.

Assuming credit history isn't too bad, you should be able to get a lower rate.

mpbaker22

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Re: How would you approach this debt?
« Reply #8 on: March 05, 2013, 10:35:17 AM »
If you can consolidate the loans into a lower rate, do so. Otherwise take one of two approaches:

1 - the ideal way to take the highest interest rate debt and tackle it first. Pay the minimum on everything and dump as much money as you can on the high interest rate loan.

2 - If you need motivation, tackle the smallest debt first to gain some momentum, then take the approach listed in #1.

Assuming credit history isn't too bad, you should be able to get a lower rate.

Note that these two strategies are the same for the first two loans.  Number 7 and 8 are not only the two largest accounts, but also the highest interest rates.  Hit them first either way.
It's hard for me to speak on the emotional side of paying off the smallest first as I've never had more than one loan at a time.

MrsStubble

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Re: How would you approach this debt?
« Reply #9 on: March 05, 2013, 10:59:14 AM »
In terms of the deferring the payment - I'm not saying there aren't reasons some people would want or need this but if your goal is to pay the debt down (which was mine) then it doesn't help to be giving them a free loan with your own money - especially if you are paying ahead on a variable rate loan since they are holding that money in escrow and they're not counting that money towards your principal when they calculate the amount of interest owed.  I'd still say if you think you need to keep the deferring on the loans then you may be better contacting the lender and asking for an an official payment deferral for a few months so you can build up some emergency money.  Just my thought though, I take no prisoners with loans.   

iamsoners

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Re: How would you approach this debt?
« Reply #10 on: March 05, 2013, 11:06:13 AM »
The only thing I'll chime in here is that in your situation, I personally would wait until after the marriage before throwing more of your money at her loans.  The first thing we did when we got home from our honeymoon was write a check to retire his student loans but it was just something I wasn't comfortable doing prior--plus he was making a lot of progress on his own and I think it was important for him to see that he could do it...

Kazimieras

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Re: How would you approach this debt?
« Reply #11 on: March 05, 2013, 11:16:51 AM »
It's hard for me to speak on the emotional side of paying off the smallest first as I've never had more than one loan at a time.

You're not alone there, but in my experience showing that it is possible to obliterate a debt can be the first step. Honestly most people think they need to be in debt forever, and that's horrible they think that way. Baby steps for some people is what works best. For others who are natural savers the most logical route is the best way to go.

Use it up, wear it out...

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Re: How would you approach this debt?
« Reply #12 on: March 05, 2013, 11:44:17 AM »
The only thing I'll chime in here is that in your situation, I personally would wait until after the marriage before throwing more of your money at her loans.  The first thing we did when we got home from our honeymoon was write a check to retire his student loans but it was just something I wasn't comfortable doing prior--plus he was making a lot of progress on his own and I think it was important for him to see that he could do it...

+1

anastrophe

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Re: How would you approach this debt?
« Reply #13 on: March 05, 2013, 12:49:36 PM »
The only thing I'll chime in here is that in your situation, I personally would wait until after the marriage before throwing more of your money at her loans.  The first thing we did when we got home from our honeymoon was write a check to retire his student loans but it was just something I wasn't comfortable doing prior--plus he was making a lot of progress on his own and I think it was important for him to see that he could do it...

Interesting. So far I haven't made any direct payments--instead, I pay 60-70% of our shared expenses, and I've paid for the wedding and the honeymoon. I'm not sure if I am comfortable making a direct payment, but she has been paying just above the minimum for 6 years already and they've only grown. I can't figure out why I shouldn't since I have the money and she doesn't (well, I only make $3K a year more, but my debt is not so serious).

EMP

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Re: How would you approach this debt?
« Reply #14 on: March 05, 2013, 02:19:10 PM »
In terms of the deferring the payment - I'm not saying there aren't reasons some people would want or need this but if your goal is to pay the debt down (which was mine) then it doesn't help to be giving them a free loan with your own money - especially if you are paying ahead on a variable rate loan since they are holding that money in escrow and they're not counting that money towards your principal when they calculate the amount of interest owed.  I'd still say if you think you need to keep the deferring on the loans then you may be better contacting the lender and asking for an an official payment deferral for a few months so you can build up some emergency money.  Just my thought though, I take no prisoners with loans.   

+1 to this

Also, what kinds of loans are you looking at subsidized v. unsubsidized and are they all with one servicer?

The reason I'm asking is because at your income and given the size of the loans she would qualify for IBR. For the first 3 years she qualifies for that...

"Interest payment benefit—If your monthly IBR payment amount doesn’t cover the interest that accrues (accumulates) on your loans each month, the government will pay your unpaid accrued interest on your Direct Subsidized Loans or Subsidized Federal Stafford Loans (and on the subsidized portion of your Direct or FFEL Consolidation Loans) for up to three consecutive years from the date you began repaying your loan under IBR."

So put some or all of the loans in IBR to take advantage of that, then make additional payments to the higher interest rate loans, providing they're with different servicers. 

Another nice perk to IBR is that interest isn't capitalized when you come out of it unless you do something dumb and request a forbearance. 

anastrophe

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Re: How would you approach this debt?
« Reply #15 on: March 05, 2013, 02:24:20 PM »
Also, what kinds of loans are you looking at subsidized v. unsubsidized and are they all with one servicer?

The reason I'm asking is because at your income and given the size of the loans she would qualify for IBR. For the first 3 years she qualifies for that...

"Interest payment benefit—If your monthly IBR payment amount doesn’t cover the interest that accrues (accumulates) on your loans each month, the government will pay your unpaid accrued interest on your Direct Subsidized Loans or Subsidized Federal Stafford Loans (and on the subsidized portion of your Direct or FFEL Consolidation Loans) for up to three consecutive years from the date you began repaying your loan under IBR."

So put some or all of the loans in IBR to take advantage of that, then make additional payments to the higher interest rate loans, providing they're with different servicers. 

Another nice perk to IBR is that interest isn't capitalized when you come out of it unless you do something dumb and request a forbearance.

Nope. They are private loans except for #2 and #8, and have been in repayment since 2007. It's a bad situation. I think they are also not eligible for consolidation either.

EMP

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Re: How would you approach this debt?
« Reply #16 on: March 05, 2013, 02:31:03 PM »
Yikes!  And at $500/month you're probably looking at an extended payment plan or some kind of increasing payments. 

I don't know anything about private loans.  I just imagine them to be some kind of nightmare.  Federal loans are bad enough, but they do have *some* perks.

Angie55

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Re: How would you approach this debt?
« Reply #17 on: March 05, 2013, 05:27:10 PM »
Cut expenses and pay those suckers off! Start with highest interest. There's no expectation that the libor will go up over the next 2 years so your variable loans should stay fairly low. Map out the order you'd like to pay them off. Cut expenses where you can and just start chugging.

Also, really think about your job and its benefits. I'm guessing student loans were a result of some generic liberal arts degree based on the low salaries. Think outside the box in your job choices and really sell your skills rather than trying to fit into the typical job with your degree.

Also, its up to you to judge whether you feel comfortable paying on them now. But personally I don't really see a difference before or after you say I do. She could leave you just the same 6-months after a dream wedding as while you are engaged. You have to use your gut to judge this.

Together my husband and I started life with 200k in student loan debt. Hopefully one day that number will be zero. It really is just a long road.

« Last Edit: March 05, 2013, 05:29:04 PM by Angie55 »

153

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Re: How would you approach this debt?
« Reply #18 on: March 06, 2013, 11:53:39 AM »
Just wanted to share - since you said you have Sallie Mae loans.

My husband and I have 6 figures in med school loans- mostly with Aunty Sallie. We received an offer for a Sallie Mae branded credit card - we get 5% cash back on gas and groceries, and 1% on everything else. You can apply the cash directly to the loan principle. It's an extra payment, and does not reduce the amount of the monthly payment, which we actually find to be in keeping with our mustachian ways.

I have had store clerks and acquaintances comment on the card when I use it, you would not believe how many people are disappointed on my behalf that I don't get to use the cash back to offset our monthly payment!