Author Topic: Student Loans - Applying Graduated Repayment to Avalanche Method  (Read 2641 times)

onionscelerypeppers

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Hello, everyone. This will be my first post1 here, so here it goes:

I currently have about $21,000 left in student loans. I have been paying them off for about a year and a half. I accumulated these loans in my much less mustachian days.

These are all federal (US) government loans. The balances and interest rates are here:

$3,0283.15%
$3,9603.15%
$691.946.55%
$4,8523.61%
$1,8633.61%
$4,7604.41%
$1,8104.41%


My currently monthly payment: $267

Since finding this forum, I have gotten a bit smarter about debt, and I believe I can feel the first bit of peach fuzz starting to come in. Over the past year, I have been increasing my monthly payment amount and have now hit about $467/mo with every intention of increasing this payment more so long as it makes sense. The excess payment is applied to the highest interest loan.

I have recently come to realize that I could instead switch to the graduated repayment plan. The schedule would be as follows:

Number of Payments       Monthly Payment
24                                             $183
24                                             $217
24                                             $259
24                                             $307
6                                               $365


However, I would continue to pay the same amount ($467/mo) as I do now. In fact, I plan to increase it even more. My understanding is that my minimum payment across all loans will decrease, and I would have more "excess payment" that would go toward that higher interest loan, thus knocking it out even faster than I already am. Seems like an easy choice!

This assumes my income remains stable, which I am comfortable that it will.

My question is: Does this idea have any hidden repercussions? Does choosing a different plan have credit score implications, or anything like that? I feel like everybody should be doing this! It seems to be that this could easily shave a couple of months and a couple hundred interest-bucks off my loan repayment schedule. That's easily worth the 5 minutes it would take to change my plan online.


Thanks for indulging in my rather particular story. I hope it applies to others and that they may find use in it.

________________________________________________________________
1Obligatory 'long time lurker, first time poster and happy to be here', 'I did a search on this but couldn't find anything', etc etc.


MDM

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Re: Student Loans - Applying Graduated Repayment to Avalanche Method
« Reply #1 on: May 24, 2017, 05:06:52 PM »
OCP, welcome to the forum.

You might try downloading the spreadsheet (not the obnoxious "Download" ad) at Debt Reduction Calculator, and see what different repayment options could do for you.

batemama

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Re: Student Loans - Applying Graduated Repayment to Avalanche Method
« Reply #2 on: May 24, 2017, 05:27:18 PM »
My husband and I did this. We went with the graduated plan to apply the difference in payments to higher interest debt. We did the number crunching and ended up saving a ton more on interest. We had credit card debt as well though.

One thing to note, our loan servicers had some major problems with us paying down extra on the higher interest loans once we switched to the graduated plan. It seems like every other month the thing tried to recalculate our payments. One of the reps I talked to said it was because the computer was trying to keep our loan pay off date the same. We were able to get them to fix it each time though via phone or chat. It just was annoying.

Bracken_Joy

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Re: Student Loans - Applying Graduated Repayment to Avalanche Method
« Reply #3 on: May 24, 2017, 05:29:38 PM »
Not your question, but have you considered NOT paying down the sub-5% loans? That money would almost certainly give you better returns through investing, especially if you're not already maxing all tax advantaged space available to you (401k/403b, traditional or roth IRA, HSA).

onionscelerypeppers

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Re: Student Loans - Applying Graduated Repayment to Avalanche Method
« Reply #4 on: May 24, 2017, 05:39:52 PM »
Not your question, but have you considered NOT paying down the sub-5% loans? That money would almost certainly give you better returns through investing, especially if you're not already maxing all tax advantaged space available to you (401k/403b, traditional or roth IRA, HSA).

Not the question, no, but a very good question! I only lightly addressed it with my "so long as it makes sense" comment in the peach fuzz paragraph. In fact, I've already opened and am fully funding a Roth IRA with Vanguard and am continuing to increase my 401k contributions. This is almost entirely thanks to MMM and the people of this forum giving me motivation.

For me, it still makes sense to pay off the debt, mostly because of psychological reasons. It's a combination of just "getting rid of debt" and not really loving my choice of career, even if i am lucky enough to be taking advantage of the things described above because of it.

These psychological reasons could change and I may instead lower my payments to the minimum and throw more at the 401k or other vehicles.

Bracken_Joy

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Re: Student Loans - Applying Graduated Repayment to Avalanche Method
« Reply #5 on: May 24, 2017, 06:08:46 PM »
Not your question, but have you considered NOT paying down the sub-5% loans? That money would almost certainly give you better returns through investing, especially if you're not already maxing all tax advantaged space available to you (401k/403b, traditional or roth IRA, HSA).

Not the question, no, but a very good question! I only lightly addressed it with my "so long as it makes sense" comment in the peach fuzz paragraph. In fact, I've already opened and am fully funding a Roth IRA with Vanguard and am continuing to increase my 401k contributions. This is almost entirely thanks to MMM and the people of this forum giving me motivation.

For me, it still makes sense to pay off the debt, mostly because of psychological reasons. It's a combination of just "getting rid of debt" and not really loving my choice of career, even if i am lucky enough to be taking advantage of the things described above because of it.

These psychological reasons could change and I may instead lower my payments to the minimum and throw more at the 401k or other vehicles.

I'm letting $22k of sub- 4.8% student loans ride. I understand on the psychology! I came into MMM thinking I would pay cash for a house- a LOT of my views have been changed because of this forum! Anyway, it doesn't mean psychology is the WRONG reason to do something, you just need a full understanding of the math so you know for sure what you are giving up.

Benefits to letting lower-interest loans ride out:
-Student loans, if you itemize, allow you to deduct student loan interest
-When loan rates are fixed, and payments are fixed and low, you have a hedge against inflation
-Cash flow is incredibly powerful. You can always throw lump payments at loans if cash accrues beyond what is usable in tax advantaged accounts, whereas regular contribution to your tax-advantaged accounts serves to 'dollar cost average' the market, which is incredibly powerful in terms of smoothing out timing factors in your contributions.


Some threads discussing this question:
https://forum.mrmoneymustache.com/ask-a-mustachian/inflationdeflation-discussion-are-low-interest-loans-worth-keeping/
https://forum.mrmoneymustache.com/welcome-to-the-forum/low-interest-student-loan-pay-it-off-or-keep-it/
https://forum.mrmoneymustache.com/ask-a-mustachian/need-advice-stay-invested-or-pay-off-low-interest-loans/
https://forum.mrmoneymustache.com/ask-a-mustachian/paying-off-low-interest-loans/

As you can see, there is NOT a consensus about the best course of action. Psychology is a valid input, especially if you are not sure you WOULD keep that money and invest it sensibly, and would instead lifestyle inflate instead.

All this of course applies to the below-5% ones, there isn't any question the 6.8% should be paid down right away. AND this assumed they are fixed rates. If they are variable, this all goes out the window.

onionscelerypeppers

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Re: Student Loans - Applying Graduated Repayment to Avalanche Method
« Reply #6 on: May 24, 2017, 06:35:35 PM »
Very Good advice

Absolutely. And, they are fixed rates. I'm in a pretty fortunate position as far as these things go. I don't expect the psychological aspect to last very long - I think I'm still just riding the high of mustachianism and am looking at all kinds of strategies in top of increasing my savings rate. It's good stuff! I am pretty excited about boosting my 401k contributions..

Thanks again for all your help! My main concern was that there's some strange legal or monetary aspect to it that I wasn't thinking of. It sounds like this isn't the case, and hopefully people find use in this.

Cheers!

Bracken_Joy

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Re: Student Loans - Applying Graduated Repayment to Avalanche Method
« Reply #7 on: May 24, 2017, 06:38:06 PM »
Very Good advice

Absolutely. And, they are fixed rates. I'm in a pretty fortunate position as far as these things go. I don't expect the psychological aspect to last very long - I think I'm still just riding the high of mustachianism and am looking at all kinds of strategies in top of increasing my savings rate. It's good stuff! I am pretty excited about boosting my 401k contributions..

Thanks again for all your help! My main concern was that there's some strange legal or monetary aspect to it that I wasn't thinking of. It sounds like this isn't the case, and hopefully people find use in this.

Cheers!

It was a solid question! =) Hope it serves as a resource for people. Also, if you ever need to search the site for stuff, the forum search doesn't work well. Go to google and use the "site:" shortcut to browse that way. Like "site:forum.mrmoneymustache.com keeping low interest loans" (The "I did a search and didn't find anything" made me think of that... although re: legal/tax implications, I doubt anything was out there yet!)

clarkfan1979

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Re: Student Loans - Applying Graduated Repayment to Avalanche Method
« Reply #8 on: May 25, 2017, 10:03:10 PM »
You have a good idea. I have been doing this for the past 6 years. I have loans at 6.55% and 2.4%. I am on the 25-year graduated plan, which is current $189/month. However, I typically pay about $500 extra a month and the extra all goes to the 6.55% loans. I am not aware of any negatives.

onionscelerypeppers

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Re: Student Loans - Applying Graduated Repayment to Avalanche Method
« Reply #9 on: May 26, 2017, 07:45:15 AM »
You have a good idea. I have been doing this for the past 6 years. I have loans at 6.55% and 2.4%. I am on the 25-year graduated plan, which is current $189/month. However, I typically pay about $500 extra a month and the extra all goes to the 6.55% loans. I am not aware of any negatives.

Perfect. In your situation, it sounds like it will be even more beneficial. Congrats!