Which loan gets a cash bolus?

[tweedscholar]

Let us pretend I have $1000 laying around (by laying around, I mean slowly and quietly acrrued after moving to slightly cheaper housing).

This puts me in the happy position of being able to put a cash bolus towards paying off my (grooooooan) student loans. I have no other debt, so this is really where I want to put it. This is also my financial weak spot because I do not really understand the ins and outs regarding consolidation, government loans, different interest rates and blahblahblahblah...

Unfortunately I have several different loans. I don't know how / if I can consolidate them because they are mostly government owned. To make it worse, 4 of them are owned by one organization, and that organization assigned different interest rates to each. Egads. I'm also not sure if I can earmark to make the extra kill off one loan instead of being spread about all 4. Phone calls will have to be made (I so hate being on hold).

On to the numbers!
Holder 1, Loan A: $3460 at 3.76%
Holder 2, Loan A: $4230 at 5%
Holder 3, Loan A: $12,400 at 4.75%
Holder 3, Loan B: $4,800 at 6.8%
Holder 3  Loan C: Same as loan B. Yes, I have two loans for identical amounts, identical rates, held by the same lender. Color me baffled.
Holder 3, Loan D: $322 at 6% (Considering the hundreds I've given these people in the last few years, this loan shouldn't even exist...but noooo. They're weird like that.)

Again, I'm not sure about the possibility of earmarking payments between the loans held by #3 (because you'd be certain that Loan D would be gone by now if I could do that). Holder 2 is New York State (SUNY Student Loan), and Holder 3 is the US Dept of Education.

Would it be to my benefit to consolidate, considering they are governmentally held (and I'm pretty sure the interest rate are fixed)? If I can't consolidate and all the rates remain fixed...

Which loan should I throw the money at? Gimme your reasons.


Meanwhile, I guess I'll be making some phone calls this week.
Thanks,
SMR

[TN_Steve]

Assuming that you can't consolidate (I know absolutely nothing about the details in this area, so I'll defer to others' knowledge on it), the textbook answer is that you should allot the entire 1000 to the loan with the highest interest rate, B and/or C.  That gives you the most bang for your buck.

The nontextbook, "snowball," answer is to pay the 322 on Loan D to get rid of it entirely, put the remaining 678 to B and/or C, then put whatever the payment on D was/is to B and/or C as well.  (In your case, this is a pretty good approach, since D is not that much cheaper than B & C)

Going forward, get rid of the loans in inverse order to their interest rate (i.e., again B and C should be numbers 1 and 2 to kill).

All of this assumes that you already have an emergency fund.  Note also that the "A" loans, at a lower rate, may not call for paying off especially quickly, depending upon your risk tolerance and investment plans.  Not so for everything at Holder 3.  If you can't consolidate at a lower rate, those rates are higher than you can safely count on with your investments.

[Another Reader]

Some of the student loan servicers are nightmares to deal with.  Whatever info you get from the CSR by phone is non-verifiable and possibly wrong.  The phone should be replaced by your internet connection.  All of these accounts should be set up on-line so that you can access the loanholder's website and pay through your bank's bill pay service.  That way you control where the money goes.

Yours is a situation where the Dave Ramsey snowball approach makes sense.  It allows you to slay more of these dragons earlier, giving you fewer to fight and a less complicated and less stressful life.  Every month you take the pot of available cash, make minimum payments on all but the smallest, and throw the rest of the money at the smallest balance.  Throw it at the two smallest balances if one will be paid off that month.  Next month, do exactly the same thing.  With an extra thousand a month, you will have knocked out the three smallest loans in about 8 months.  Then you can work on the three biggest loans and knock them out in less that 22 months.  Done in 30 months or less. 

Yes, you will pay a few dollars extra in interest, but each loan gone is less risk to you if you are laid off or something else happens.  Comfort level counts, especially if you don't really understand these loans to begin with.  Consider this experience a cheap education on loans.  Next time, don't borrow money unless you understand all the terms and conditions, especially the part about how you will pay back the money.

[sibamor]

I vote lowest balance up.  Within a year you can be out from under 2 loans no problem.  Snowballing those payment amounts up into the next highest will give you the gratification of paying off the loan and encourage you to see where else you can slice expenditures to contribute towards killing all your loans.  Best of luck!

[Karl]

Good-morning,

Congrats on reducing your living expenses and keeping your standard of living relatively unchanged.  Doing these two together gives you much more freedom.

Given your stated lack of knowledge about your education-based financial liabilities.  I suggest that you start by determining if consolidating them all into one loan would help.  You can start your self-educational process here (http://studentaid.ed.gov/repay-loans/consolidation).   With consolidation, you would end up dealing with only one loan, one interest rate, and one lender (much less time on the phone).  On the other hand, it may increase your interest rate on some of the loans.

Once you have decided if this means of reducing your stress makes sense to you, then you might want to return to your original question about how to pay down the debt.

Good luck and happy (loan) hunting---kill the wabbit!

Karl

[TN_Steve]

Kudos to Karl for knowing and referring to the loan stuff.

His suggestion is spot on: first things first, and simplify. 

[Jack]

Unless you can lower your average interest rate by doing it, consolidation is bad in my opinion. With the multiple loans you have now, you have the flexibility to either preferentially pay the highest-interest ones first and save money, or pay the lowest-balance ones first (i.e., snowball) and improve cash flow. Consolidating eliminates both of those possibilities, which means it's a sucker's game unless you're getting compensated for it in the form of lower interest rates. And if I understand correctly, consolidating Federal loans these days does not lower the interest rate, so don't do it.

My specific suggestion would be to pay off the loans in this order: 3D, 3B, 3C, 2A, 3A, 1A. The rationale is that loan 3D has such a low balance that it's not worth continuing to deal with, then the rest will be ordered to minimize interest paid.

[tweedscholar]

I do not have the $1000 EVERY month. It's built up over the last 6ish months, along with a stronger emergency fund. After moving in with the handsome boyfriend, gasoline usage and rent went down AND he pays all the utilities :) Which is fine by him, because he's still banking too - his rent went down more than mine did and we no longer have to use coin-op laundry.

If I can get myself more disciplined about taking more overtime at work, I know can make a bigger dent. My full-time class load (which comes with horrible expenses like books, mandated shoes, mandated shirts, etc that Work isn't paying for) on top of >full-time work leaves me exhausted, though. Last year I was able to save up enough to get (much needed) repairs on my car and buy my mother a small refrigerator (hers died in an unsalvageable way) just on overtime. Each overtime will only get me about $160 after taxes, so the cost/benefit ratio is...siiiiiigghh.

So some searching and password resetting revealed this information:
If I do the payment online (and ONLY if I do it online), I can allocate specific payments to specific loans with Holder 3. So I could get rid of 3D ASAP.

Thank you for the info Karl. I looked at the website with the Loan Consolidation Calculator - incredibly helpful.

I can consolidate, but ONLY the ones under Holder 3. This would bring all of those smaller loans under one payment, and an interest rate of 5.5%. That is (calculator time) just a hair below the current weighted average of all Holder 3 Loans (5.65%). Without Loan 3D in the mix, the new rate is still lower than the weighted average (5.5% compared to 5.64%). The minimum monthly payments will go down by $40. Oh, and the rate is fixed.
One last fun fact: the interest rate of 5.5% is only if you do auto-pay. Otherwise it would be 5.75% (which is HIGHER than the weighted average). Auto-pay scares me a liiiiittle. There was a time when I was out of work (on disability) and I was scraping at the last $50 of my checking account. Not being able to postpone a payment by a week if I desperately need to is frightening. Then again, living with my boyfriend (who makes more than me) gives me a little more leeway in living expenses, so maybe I shouldn't be so afraid. But that's easier said than done, right?

Of course, these are the estimated values. Once I get my taxes done, I'll also be able to put in data for income adjustment. Then find someone's hand to hold while I click the big "Consolidate now" button.

So, with this new information, I think the best option may be to pay off 3D now (because I can), consolidate all the Holder 3 loans into one, then...well, keep working away.

After that, Loan 3 will be just over 21k and it will have the highest interest rate. If I get to a point where I can kill off loans 1A or 2A, (because 4k in my bank account is far more likely than 21k), should I? Their rates are lower, but they are also easier to get rid of in one blow.

Vote!! I call for a Vote!! Snowball effect - if I work my butt off and get a magical "extra 3-4k" later this year, should I Chip away at the biggest loan with the highest interest or does it Slay smaller dragons completely?

If you use math in your argument (and I can understand it), it might lend an extra point to your view.

[nolajo]

So, by my math, you'll be paying $34 on loan 1, $45 on loan 2, and $227 or so on loan 3 per month after you consolidate. My feelings on the matter are partly mathematical and partly psychological. You say you've had some periods where cash flow was a problem, which is part of the reason that you're hesitant to consolidate with auto-pay. I totally get that. I also (though this speaks way more to personal experience than anything) wouldn't count long term on anything beyond my funds for paying all my bills (ahem, lessons from exes, ahem). Thus if you were able to scrape an extra $4000 or so together, I would throw it at loan 2. It's not far behind loan 3 in terms of interest and it frees up more cash on the regular.

After that, it's a bit of a toss-up in my mind. Again, $3000 is a lot easier to come up with than what would then be $18,000 and it does mean more cash flow and possibly the lovely mental boost of paying off a loan altogether a la Dave Ramsey. It being such low interest though, it would technically make more sense to keep plugging away at them both and throwing the extra at the bigger loan. (Unless that would unnecessarily complicate the auto-pay situation. If it would, I'd just find a nice money market account or index fund depending on your risk tolerance to put the extra in until you could pay it off in full.) It comes down to cash-flow in the immediate future versus total cost of the loans long term and which of those you feel is more important.

[Rosy]

Do the consolidation loan for holder 3 only if you understand the math and the math makes it profitable to do so, which it seems to do. Is there a charge for consolidation?

The loan from holder 2 is the one you might consider paying off first, simply because it will be only $4230 compared to the new consolidated loan amount from holder 3 for $21K. It will free up more cash to throw at holder 3 and will eradicate a really nice chunk of debt.
Based on the interest rate, holder 1 is the last one to be paid off - set it on minimum for now and forget about it.

Simplified payments, saved on interest, achieved more control via paying online and now you have a pay off plan that makes sense mathematically. Sweet!

[ShoulderThingThatGoesUp]

Folks, this thread is from 2013. I don’t think the OP is checking back in.