Student Loans- Deferment complexities

[Landor n Stella]

We have a grand total of about $55,000 in student loan debt that we are working off. However, both of us are also in school now (for free this time, don't worry) and therefore we have deferment on a collection of our loans. We intent to continue making payments, but my question is:

If we have deferment on all but one, should we be making the minimum payment on all of them and extra payments on the one that is not deferred; or should we make interest only payments on the deferred loans and lump the rest of what we would pay into the one that is active to pay it off faster?

Here's the breakdown:

$14,034.43 - Active - Min. payment:$150 - Interest Rate: 5%
$11,981.01 - Deferred - Min. payment: $103 - Interest Rate 6%
$15,129.8 - Deferred - Min. payment: $202 - Interest Rate 3%
$8,055.95 - Deferred - Min. payment: $212 - Interest Rate 4%

The ones that are deferred are subsidized, which means they will not capitalize interest while in deferment. The deferment is scheduled to go until Fall of 2013 at this point. So we have ~$500 that we use to make payments every month, plus we throw anything we can spare at it each month too (recently that has been about $800-$1000 extra). I'm just wondering what our strategy should be to pay off these ASAP.

 

[Stubbleman]

Advice from a very junior mustachian:

I would pay all that you can on the loan that is currently accruing interest.  If the others currently require no payment, you should have it paid off before the others go active.  Once that loan is paid off, stash your extra cash into the highest rate, safe, and liquid savings instrument you can find.  That way your money can work for you until the time at which those other loans go active.

Once you get close to the fall 2013 deadline, take your savings and pay as much as you can towards the loan with the 6% interest rate.  Perhaps set a goal to have that one paid off before it goes active? Next make payments slightly larger than the minimums on the remaining loans, and funnel the majority of your cash to the highest interest rate loan.

To be sure and comfortable with your decision, setup a spreadsheet and model your payments over time.  Do a cash flow calculation and determine how much you can have paid off before they go active.  Then determine how soon you can have the rest paid off.  Play with the payments to see how it affects the cost.

My wife and I are in a similar situation.  She's done with grad school in May, we have one deferred loan that is not accrueing interest.  We took it solely to take advantage of the interest free money.  We have cash waiting in the savings account to pay it off.

Good luck.

[arebelspy]

I would pay all that you can on the loan that is currently accruing interest.  If the others currently require no payment, you should have it paid off before the others go active.  Once that loan is paid off, stash your extra cash into the highest rate, safe, and liquid savings instrument you can find.  That way your money can work for you until the time at which those other loans go active.

Agreed, that's the mathematically perfect way to do it, assuming you have no other debt.

[FrugalToque]

The first question I'd have to ask is if you can actually make "interest only" payments without getting some kind of administrative fee dinged on your accounts.

The phrase "minimum payment" implies some kind of punitive measure.

Otherwise, it seems like the smartest thing to do is pay off the active loan first.  There are situations, though, if you were taking a long time to pay off all these loans, that it might make more sense to dump money into the 6% deferred loan*.  Given your Mustachian leanings, however, I'm sure you'll be going at these loans pretty hard-core and those situations won't apply.

* - imagine if these loans were going to hang around for years afterwards.  The upfront benefit of saving interest payments on the 5% loan from now until Fall 2013 would eventually be overtaken by years of interest payments on the 6% loan later on.

[Landor n Stella]

WRT other debt, we have an Auto loan that is at a very low rate - 2.75% I believe- and the balance is at $6,000. No other debt.

Thanks for all the advice! I was thinking that was the correct way to proceed but it's nice to have other level-headed human beings validate for us. ~Stella

[MEJG]

I'm not positive, but you may be able to consolidate with the direct loan consolidation being offered from now - June 2012.  Under this consolidation your interest rate is a weighted average MINUS 0.25%.  Then you can set up automatic payments and get another 0.25% off.  A loan for $55,000 at 5% (I didn't do the math but yours should be lower) over 30 years (which you qualify for) would be about $295 a month.

If you are pretty confident you can put $500 a month towards those loans until you finish school what I would do is consolidate and pay them all.

Not the point is not to pay for 30 yrs! it's to shovel that whole $500 into the loans + any extra.  You'll be payed off faster since you'll have a lower interest rate.  To be perfect with the math you should consolidate at the end of the offer period.

If you don't qualify I would go with Stubbleman's plan.

[Junebug]

OK, I'm confused.  What does the "active" loan mean?  Is that the only unsubsidized loan you have or is it a private loan that is ineligible for deferment? 

Because if portions of those loans that are deferred are unsubsidized then they are still accruing interest and it will capitalize.  In that case just start with the highest interest rate and work your way down, right?

Here's my advice based on the assumption that the active loan is the only unsubsidized loan you have.   

I wouldn't go through the hassle of consolidation.  Especially since some of the older, private loans have great interest rates and lender incentives for automatic payments, as well as incentives for a specific number of on time payments. 

Stubbleman's plan makes the most sense to me, but what is your plan for the end of 2013/2014...

Well if your agi for 2013 is low enough, you might be able to qualify for  a $0/month payment under the IBR.  Why do that?  Because the government will pay the interest on the subsidized portion of your loan for the first 3 years you qualify for that.  Now, there are some tricks to that, but it could be worth your time to look into it. 

[Landor n Stella]

Yes, the active loan is the only one that is private unsubsidized and not eligible for deferment.

I think we will be paying our $500+ dollars per month to the one that is active right now. We should have no problem paying it off by the end of 2013, and at that point we can start making payments on the others. There is a good chance that Landor will stay in school past that point, anyway, so his would still be deferred. And mine would be the ones we would work on at that point.

I think one other loan might be unsubsidized, now that I think about it, but I will find out and make the interest payments now until it comes out of deferment so the balance doesn't increase.