Save to pay down an upcoming high-interest loan or pay down existing loans?

[OctaviusIII]

I'm a first year master's student at Cornell, and like so many other students I'm doing student loans. We are about to come into a large parental loan at Perkins rates - 5%, not payable until 6 months after graduation, interest accrues at that point - that will allow us to pay off our credit card and high-interest student loans. Our structure now is:

My Stafford Loan, $5,794, 6.8% (interest accrues starting Nov. 2017)
My Unsubsidized Loan, $8,989, 6.8% (interest accrues starting Nov. 2017)
My Plus Loan, $8,893, 8.5% (interest accruing now)
Wife Plus Loan, $6,779, 8.5%
Wife Stafford Loan, $10,484, 6.5%
My Parental Loan, $8,250, 5%
Car Loan, $9,435, 6.79%
IRS, $9,360, 1.3%
Credit Card, $9,000, 16.24%

We will be paying down our highest interest loans with our new parental loan for $24,750. That will kill the credit card, my big PLUS loan and my wife's PLUS loan. The question is, then, do we save up to pay off upcoming PLUS loans (I'll be getting another 3 before graduating) or do we put our excess cashflow into the next-highest interest loans, especially for the car?

[CU Tiger]

It seems like y'all have never met debt you didn't like...so maybe cut up the CCs and stop taking on new debt first.

I would pay off the car, the CC, and the IRS, while living as hardcore frugally as I could.

[OctaviusIII]

It seems like y'all have never met debt you didn't like...so maybe cut up the CCs and stop taking on new debt first.

I would pay off the car, the CC, and the IRS, while living as hardcore frugally as I could.

Student loans are student loans, man. We hate our debt situation, don't use the CC anymore, and are living as frugally as we can. I'm working on a proper case study to help with that. The reason I'm asking is because I don't know the math on whether it makes more sense to pay down the car first or wait for the new debt and pay it down. Given your answer, though, you for some reason think we should pay down a 1.3% loan before a 6.8% loan. That seems misguided.

But given the rest of your answer, you're suggesting we save to pay off upcoming student loan debt. Our order of operations, then:

CC first, then 8.5% loans, then save for the upcoming high-interest loans. Attack car loan once school is done or if scholarships come in.

[MDM]

We are about to come into a large parental loan at Perkins rates - 5%, not payable until 6 months after graduation, interest accrues at that point - that will allow us to pay off our credit card and high-interest student loans.

We will be paying down our highest interest loans with our new parental loan for $24,750. That will kill the credit card, my big PLUS loan and my wife's PLUS loan.

Trading high(er) interest for low(er) interest is usually correct.  Good plan.

The question is, then, do we save up to pay off upcoming PLUS loans (I'll be getting another 3 before graduating) or do we put our excess cashflow into the next-highest interest loans, especially for the car?

Without running the numbers, I'm going to guess that paying those 6.8% (and 6.79% is the same as 6.8% for practical purposes) loans now is best, and the 1.3% loan should be the last one to go.  You might look at http://www.vertex42.com/Calculators/debt-reduction-calculator.html and the spreadsheet you can download.

[Merrie]

Maybe I'm missing something, but can't you save excess cash flow to pay part of next year's tuition in cash and thereby need to take out fewer loans?

Are you sure your unsubsidized loan isn't already accruing interest? If interest isn't accruing, that's not the definition of an unsubsidized loan that I'm familiar with.

[OctaviusIII]

Maybe I'm missing something, but can't you save excess cash flow to pay part of next year's tuition in cash and thereby need to take out fewer loans?

Are you sure your unsubsidized loan isn't already accruing interest? If interest isn't accruing, that's not the definition of an unsubsidized loan that I'm familiar with.

I'll have to double-check on the unsubsidized loan, but I'm fairly sure it isn't. If it is, then it'll have to be in my repayment plan.

And that was basically the question: do we save up to pay down what new loans happen (I've already qualified for them so they will disburse) or use that money instead to pay down existing loans and let the new ones happen? After talking it out, it seems saving makes more sense.

[Axecleaver]

One thing you failed to account for is origination fees. Take a close look at how much this "cheaper rate" loan is costing you on the front end. Then you'll have to do the math on the interest rates. It's possible that a higher interest rate will be cheaper than a lower-rate loan that has new origination fees baked in.

I'm guessing without knowing the actual numbers, but you'll probably find that the optimal plan is to pay off the credit card and PLUS loans, then use the balance to avoid taking out a new PLUS loan.

[Jack]

And that was basically the question: do we save up to pay down what new loans happen (I've already qualified for them so they will disburse) or use that money instead to pay down existing loans and let the new ones happen? After talking it out, it seems saving makes more sense.

First, just because you've qualified for a loan doesn't mean you have to accept it.

Second, we don't have enough information about the expected terms of the loans (how much money you have to throw at them or how fast you expect to be able to pay them off) to do the math for you.

In general, the way you would figure it out would be to calculate the present value of all the alternatives and pick the one that has the highest (or in your case, least-negative) present value. To calculate the present value of an annuity that doesn't start until some point in the future, first calculate the value at the start date of the annuity using the "present value of an annuity" formula, then calculate the value today by plugging that result into the "present value of a future lump sum" formula.

[Merrie]

You can always reject part of a loan, thereby avoiding the origination fees on that portion. And if later in the semester you realize you need a bit more money after all you can go back and get more if you had been approved for more than you took. And if you don't do this ahead of time, after you take the loan, I think you have a certain amount of time (30 days maybe) to refuse part of it.

I got offered way more in loans for professional school than I needed and filled out a form saying I wanted the whole subsidized loan but only X many dollars of the unsubsidized and none of the "additional unsubsidized loan".