Author Topic: Prioritizing Student Loans by Interest Rates  (Read 4086 times)

SAP5243

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Prioritizing Student Loans by Interest Rates
« on: November 20, 2013, 07:18:37 PM »
I have about $47k in student loans and wondering the best way to approach paying them off.  Here are the amounts with interest rates below..

-Federal:  $11k (3.8%), $3500 (4.5%), $6000 (6.8%) <---Fixed rates
-Private (WF):  $20k (8.24%) <---Fixed rates
-Mom:  $7000 (2.4%, home equity) <---Not fixed

At first I thought it would be best to pay off the private loan first since it has the largest interest rate.  However, I have spoke to friends and family who say it might be better to pay off the smallest ones first, or at least the $6000 and $3500 federal ones.  Once I pay off those two they suggested I focus on the private loan.  What do you MMMr's think would be the most beneficial to me in the long run?

schimt

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Re: Prioritizing Student Loans by Interest Rates
« Reply #1 on: November 20, 2013, 08:04:42 PM »
Check out the attachment I posted in this thread, I'm on my iPad now or I would attach it here too, maybe tomorrow
http://www.mrmoneymustache.com/forum/throw-down-the-gauntlet/new-year-student-loan-challenge-(2014-edition)/

Enter your information and play with the strategies to see what works best for you.

Paying the smallest loans first will reduce your total minimum payment required so if you lose income it will reduce your required payment faster, but paying off the highest interest rate loan first will save you the most money in the long run.

SAP5243

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Re: Prioritizing Student Loans by Interest Rates
« Reply #2 on: November 20, 2013, 09:05:29 PM »
Awesome!! Thanks for that I'll check it out!

marblejane

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Re: Prioritizing Student Loans by Interest Rates
« Reply #3 on: November 20, 2013, 10:51:31 PM »
Honestly, if I were you, I'd pay Mom off first, especially since it is a home equity loan against her property.

arebelspy

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Re: Prioritizing Student Loans by Interest Rates
« Reply #4 on: November 20, 2013, 10:55:17 PM »
Mathematically it's always best to pay off the highest interest rate first.

Psychologically it helps some people to pay off smaller balances first because they feel they're making progress.  That would annoy me, as I'd rather feel I'm paying less in interest.  I dont want to pay extra to feel better about paying one of them off early, I'd rather get all of them paid off as early as possible.

Relationship-wise I'd pay off the family loan, but that'll depend on where Mom's at with that.
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Stache In Training

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Re: Prioritizing Student Loans by Interest Rates
« Reply #5 on: November 20, 2013, 11:26:06 PM »
Mathematically it's always best to pay off the highest interest rate first.

Psychologically it helps some people to pay off smaller balances first because they feel they're making progress.  That would annoy me, as I'd rather feel I'm paying less in interest.  I dont want to pay extra to feel better about paying one of them off early, I'd rather get all of them paid off as early as possible.

Relationship-wise I'd pay off the family loan, but that'll depend on where Mom's at with that.
+1
I'm more focused on math, and total interest paid, so I'd agree with this.  However, as paying off the smallest first will reduce total monthly payment, I could see how that would be a boost mentally, and if your income wasn't too stable.

With all that said though, Mom is a powerful figure.  I wouldn't want to make her mad. 

So up to you personally, and where your mom is standing. If she's happy with the loan being out there, then no problem, I'd definitely go with the highest interest rate.  If not, go with her.  But if your income is a bit iffy, then go with the lowest, so you just have less loans/payment amount in total.

SAP5243

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Re: Prioritizing Student Loans by Interest Rates
« Reply #6 on: November 20, 2013, 11:48:03 PM »
Thanks for all the advice guys!!  Well if I were to pay off the smaller ones first, I would still be paying a lot more than my required monthly balance to get the highest interest one off.  I do not plan to stick on the 15 year plan for these loans, and that's why I felt that taking the smaller ones out first would be good so I could lower my monthly balance and be able to put more effort into chopping down the biggest tree.

As far as mom, she wants me to pay off all other loans before focusing on her.  I was going to take out another private loan, but it was her decision to put it on the home equity just because she didn't pay a cent for my schooling, so she figured that's the least she could do to help.  I have 10 years to pay her back by the way.

I work in operations at a technology company in Seattle for $40k, so definitely not the best income.  Any other thoughts?

Stache In Training

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Re: Prioritizing Student Loans by Interest Rates
« Reply #7 on: November 20, 2013, 11:59:52 PM »
With that added info, I have an idea.  Make the minimum on all of the loans, or maybe just barely over the minimum (up to you personally), but focus on both the highest interest and smallest loan.  40K is a great salary, and you should be able to pay off that smallest loan within a year, even while paying extra on the highest interest loan.
So yes, that'll give you the bonus of lowering your mandatory monthly payment, but still be working on the mathematically best option.  Then, yes, once that small one is off, still pretend your paying it, just push it towards the high interest loan. and then just keep snowballing.  You'll be on the 5 year, instead of the 15 year plan.

Good luck!

LRS

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Re: Prioritizing Student Loans by Interest Rates
« Reply #8 on: November 21, 2013, 12:16:25 AM »
Tell your mom you love her frequently, and attack the highest-interest-rate loans first.

SAP5243

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Re: Prioritizing Student Loans by Interest Rates
« Reply #9 on: November 21, 2013, 12:27:32 AM »
Stache in Training I really like your idea!  That's what I've had in mind for a while and while writing this post.  I don't plan to ever lower my payments, just the amount required of me to cover so I have more to pay off that bigger one without continuing to incur interest from the smaller ones.  I have about 7k saved up right now for an emergency fund and no credit card debt so these loans are the only thing I focus on.  My combined living expenses with food, utilities, rent, and loans will be about 1100 a month so I'm definitely going to have leftovers to paydown these pesky loans with.

And yes LRS I tell my mom daily!  Haha, she raised me and my siblings right and instilled good values in us regarding living frugally and learning how to budget.  I guess that's a positive from these loans, learning financial responsibility the hard way.  Thank you guys for the advice I LOVE this forum!!

schimt

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Re: Prioritizing Student Loans by Interest Rates
« Reply #10 on: November 21, 2013, 05:21:34 AM »
As promised, see the attachment. Enter your information in the first table and insert your planned monthly payment, then play with the strategies. Also on the second tab you can add random planned additional payments into your plan, like tax return or selling of a vehicle ect. Can be very motivating to push that monthly payment number up as you see how much you can save in interest and how much quicker you can be debt free!

Good luck, and we all should thank our mothers daily for the sacrifices they have made for us

Nancy

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Re: Prioritizing Student Loans by Interest Rates
« Reply #11 on: November 21, 2013, 07:46:51 AM »
1.) Private (WF):  $20k (8.24%)

This interest rate is outrageous. Pay this thing off like it's on fire (because it is).

SAP5243

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Re: Prioritizing Student Loans by Interest Rates
« Reply #12 on: November 21, 2013, 06:41:58 PM »
1.) Private (WF):  $20k (8.24%)

This interest rate is outrageous. Pay this thing off like it's on fire (because it is).

Trust me I know!  I am feeling the heat right now especially after making my first payment.  Private loan interest rates are ridiculously high nowadays, it's terrible!

Nancy

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Re: Prioritizing Student Loans by Interest Rates
« Reply #13 on: November 21, 2013, 07:03:52 PM »
1.) Private (WF):  $20k (8.24%)

This interest rate is outrageous. Pay this thing off like it's on fire (because it is).

Trust me I know!  I am feeling the heat right now especially after making my first payment.  Private loan interest rates are ridiculously high nowadays, it's terrible!

You're doing an excellent job getting this squared away. Don't let the bastards (as I affectionately call private student loan companies) get you down!