Author Topic: Which Loan Should I Focus on Paying First?  (Read 6393 times)

AmandaS1989

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Which Loan Should I Focus on Paying First?
« on: November 05, 2015, 10:15:45 AM »
So here's the deal. I have ~63k in student loans across three companies. My Perkins Loans (~10,500 @5%) and my one stafford loan (~3,450 @6.8%) are currently in repayment and I put 170/month towards those. With the third loan company, Nelnet, I have around 49,600 at interest rates from 3.4% to 6.8%. For these loans I am on an income based repayment plan and I currently pay $0 per month until September 2016.

Now when I get my tax refund I will be paying off some bills and switching my phone carrier to save around $160/month as extra to go towards those loans and I will be trying to refinance them preferably through Earnest. In the meantime however, I would like to start paying something on those loans so I can get the balance down before I refinance. Even if its only by a couple hundred bucks.

Here's my problem though. Looking at all of these loans is very overwhelming and I have no idea where to start chipping away at. Should I go with the loans with the lowest interest rate? The loan with the least amount of accumulated or capitalized interest? I know the loans with the highest principal/capitalized interest will get bigger much faster than the others so should I focus on those? I have no clue where to get started and any advice will be appreciated.

Mother Fussbudget

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Re: Which Loan Should I Focus on Paying First?
« Reply #1 on: November 05, 2015, 10:23:31 AM »
Rank your loans by interest rate, and pay back the highest interest rate loans FIRST, and the lowest interest rate loans LAST.

AmandaS1989

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Re: Which Loan Should I Focus on Paying First?
« Reply #2 on: November 05, 2015, 10:26:50 AM »
I have three or four that are 6.8%. Should I pick just one and focus all the money on that or split it between all of them? If I do split it up it won't be very much going to each. Maybe I should pick the one with the highest interest rate and highest capitalized interest.

zephyr911

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Re: Which Loan Should I Focus on Paying First?
« Reply #3 on: November 05, 2015, 10:28:46 AM »
Generally speaking, you should always pay the highest-rate loans first. Make minimum payments on all but one, and pay as much as possible on that one.

You definitely want to pay off the Stafford first, then work your way down the APR scale, one at a time.

I would out the three Nelnet loans and treat them as separate loans, since they are. Being with the same institution shouldn't affect how you treat them.

As for the loans with identical 6.8% rates, it's up to you. You can pay them equally, or do them one at a time. It might be a psychological boost to take the "snowball" approach and hit one at a time, because you'll reduce your required minimum payments every time you kill one, but don't let that become an excuse to slack off.

boarder42

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Re: Which Loan Should I Focus on Paying First?
« Reply #4 on: November 05, 2015, 10:29:00 AM »
As long as the rate is fixed on all the 6.8% loans its not relevant which you pay down first.

Mother Fussbudget

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Re: Which Loan Should I Focus on Paying First?
« Reply #5 on: November 05, 2015, 10:31:09 AM »
Generally speaking, you should always pay the highest-rate loans first. Make minimum payments on all but one, and pay as much as possible on that one.
Yep.

Quote
As long as the rate is fixed on all the 6.8% loans its not relevant which you pay down first.
And that...

Imonaboat

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Re: Which Loan Should I Focus on Paying First?
« Reply #6 on: November 05, 2015, 10:34:20 AM »
The snowball method would probably work well for you, since it helps with motivation and your smaller loans seems to have higher interest rates.

List your loans from smallest to largest:

ex.
$3450
$4500
$10500
$12200

Now make a tight budget that you can live with until they are all paid off.

Pay the minimum payments on all of the loans and put everything extra into the smallest one.

When the smallest loan is paid off, add the payment from that one into the next smallest.

Be aware that you are sacrificing a small amount of money by not focusing specifically on interest rates, but it does help some people find motivation, which will keep you on track.

DCKatie09

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Re: Which Loan Should I Focus on Paying First?
« Reply #7 on: November 05, 2015, 10:37:42 AM »
One thing to double-check in your income-based repayment plan, is whether when you make extra payments it goes to principal only, or is distributed over interest and principal (the former is what you're aiming for). And ditto to everyone else's comments.

AmandaS1989

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Re: Which Loan Should I Focus on Paying First?
« Reply #8 on: November 05, 2015, 10:42:53 AM »
Thanks for the advice everyone. Nelnet only puts extra payments towards principal when ALL of the accumulated and capitalized interest is gone. :( That's another reason I want to refinance with Earnest next year.

PARedbeard

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Re: Which Loan Should I Focus on Paying First?
« Reply #9 on: November 05, 2015, 11:17:02 AM »
My personal plan was to organize my loans based on interest rate and then attack the smallest loan in the highest rate, working down the categories, until the last loan I paid off was my largest loan with the least amount of interest. Focus on one loan at a time, paying the minimums on all the others.

For example, if these were my loans, this would be the order I paid them in:
1. 3,000 @ 6.8%
2. 5,500 @ 6.8%
3. 6,000 @ 6%
4. 5,000 @ 5.5%
5. 5,600 @ 4.75%
6. 10,100 @ 4.75%
7. 10,000 @ 3%

For me, this accomplished both the tackling of high interest rates first (and thus saving some money over the few years that I did this), and the creation of motivation through seeing loans being completed. The snowball will be slow at first, but once you have one or two loans knocked out, you'll surprise yourself with how fast this can go.

zephyr911

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Re: Which Loan Should I Focus on Paying First?
« Reply #10 on: November 05, 2015, 11:30:54 AM »
**snowball approach**
Be aware that you are sacrificing a small amount of money by not focusing specifically on interest rates, but it does help some people find motivation, which will keep you on track.
This is where knowledge of self is key.
Dave Ramsey pushes the snowball because his raison d'etre is rehabilitating broke, spendypants consumers with self-control problems.
It is probably the best approach for them, even though it costs more, because it may increase their odds of sticking to the script.
OP, your call on whether you need to pay extra for "lack of self-control" insurance at this stage in your life.

AmandaS1989

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Re: Which Loan Should I Focus on Paying First?
« Reply #11 on: November 05, 2015, 11:59:22 AM »
My personal plan was to organize my loans based on interest rate and then attack the smallest loan in the highest rate, working down the categories, until the last loan I paid off was my largest loan with the least amount of interest. Focus on one loan at a time, paying the minimums on all the others.

For example, if these were my loans, this would be the order I paid them in:
1. 3,000 @ 6.8%
2. 5,500 @ 6.8%
3. 6,000 @ 6%
4. 5,000 @ 5.5%
5. 5,600 @ 4.75%
6. 10,100 @ 4.75%
7. 10,000 @ 3%

For me, this accomplished both the tackling of high interest rates first (and thus saving some money over the few years that I did this), and the creation of motivation through seeing loans being completed. The snowball will be slow at first, but once you have one or two loans knocked out, you'll surprise yourself with how fast this can go.

Thank you PARedbeard. I think that approach will work best for me.

**snowball approach**
Be aware that you are sacrificing a small amount of money by not focusing specifically on interest rates, but it does help some people find motivation, which will keep you on track.
This is where knowledge of self is key.
Dave Ramsey pushes the snowball because his raison d'etre is rehabilitating broke, spendypants consumers with self-control problems.
It is probably the best approach for them, even though it costs more, because it may increase their odds of sticking to the script.
OP, your call on whether you need to pay extra for "lack of self-control" insurance at this stage in your life.


Well Zephyr911 I believe I might just need that 'lack of self-control' insurance. I'm still in spendypants rehab. I'm not proud of it, but I'm willing to admit to it and work on improving.

Tjat

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Re: Which Loan Should I Focus on Paying First?
« Reply #12 on: November 05, 2015, 12:02:38 PM »
My personal plan was to organize my loans based on interest rate and then attack the smallest loan in the highest rate, working down the categories, until the last loan I paid off was my largest loan with the least amount of interest. Focus on one loan at a time, paying the minimums on all the others.

For example, if these were my loans, this would be the order I paid them in:
1. 3,000 @ 6.8%
2. 5,500 @ 6.8%
3. 6,000 @ 6%
4. 5,000 @ 5.5%
5. 5,600 @ 4.75%
6. 10,100 @ 4.75%
7. 10,000 @ 3%

For me, this accomplished both the tackling of high interest rates first (and thus saving some money over the few years that I did this), and the creation of motivation through seeing loans being completed. The snowball will be slow at first, but once you have one or two loans knocked out, you'll surprise yourself with how fast this can go.

This is great advice. The straight Dave Ramsey 'ignore all interest rates' is so tiring - and insulting by way of implying that people are so unintelligent that they have to cave solely to the psychological wait of checking off a loan. Your method is a true mustachian adaptation.

seattlecyclone

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Re: Which Loan Should I Focus on Paying First?
« Reply #13 on: November 05, 2015, 12:53:43 PM »
If you can stick to the plan, highest interest rate first is optimal, as others have said. In case of ties I might prioritize the smaller loan, because paying one off completely frees up some cash each month that could be diverted elsewhere in case an emergency comes up.

Playing with Fire UK

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Re: Which Loan Should I Focus on Paying First?
« Reply #14 on: November 06, 2015, 09:24:10 AM »
PARedbeard's approach is what I would use. 

Also check out how when the extra payments are applied to the account, and how many payments you can make. The sooner a payment is applied to the account the sooner it is working for you, so ideally the payment would be made on payday.

Sibley

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Re: Which Loan Should I Focus on Paying First?
« Reply #15 on: November 06, 2015, 01:21:20 PM »
An option might be to consolidate all or part of the loans to a lower interest loan. If this is to a private loan, you might lose some of the options you currently have. Something to consider at least, but be very careful to make sure you understand exactly what the pros and cons are before you do this.

You can also do a consolidation loan where it stays in the government arena. These have different pros and cons than a private consolidation.

Also, it's standard to apply payments in this order, regardless of the type of debt: late fees/penalties, interest, principle. Anything else is unusual. Capitalized interest is principle, even if they don't call it that.

Dicey

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Re: Which Loan Should I Focus on Paying First?
« Reply #16 on: November 06, 2015, 01:45:59 PM »
Is a refinance/consolidation with So-Fi an option for you? I don't see it mentioned here. I've never been in your shoes, so I'm only going to tender this next suggestion very gingerly. Are you disciplined enough to get a 0% + no balance transfer fee credit card and use it to pay some of this off? Assuming you can pay it off on time (preferably early) and can afford the payments on the rest of them while you pay off the CC. Lather, rinse, repeat. Or combine consolidation and BT's, but only if you are very, very disciplined. Good luck, planning is a great first step to SL freedom.

AmandaS1989

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Re: Which Loan Should I Focus on Paying First?
« Reply #17 on: November 06, 2015, 02:34:36 PM »
I applied with SoFi and was turned down. :( I'm going to try with Ernest maybe around March or April next year after I've paid some other stuff off and freed up some cash. And my one-year at my current employer will be May 9th of next year so I'm praying I get a raise. Even an extra 1k would be awesome.

Transferring some of it to a no-interest CC? Hmmm. I'm not quite sure how to do that. Would I just make a payment for the amount of the loan using that CC and then pay it off before the interest expires? I could do that. I don't know though. I already have 5 paid off cards and one no interest with a little over $800 left with the no-interest going up to 14% in July of '16. I'm not sure if I want to apply for another card at least not right now. But that is a good suggestion Diane. I have a PLUS loan that I'm making the payments for with around 1800 left on it at 8.5% that I'm planning to pay off with my tax refund. Maybe I could put that on a no interest card? Although I've heard that some student loan companies won't let you pay it with a cc. Is that true?

TomTX

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Re: Which Loan Should I Focus on Paying First?
« Reply #18 on: November 08, 2015, 07:15:14 PM »
I applied with SoFi and was turned down. :( I'm going to try with Ernest maybe around March or April next year after I've paid some other stuff off and freed up some cash. And my one-year at my current employer will be May 9th of next year so I'm praying I get a raise. Even an extra 1k would be awesome.

Transferring some of it to a no-interest CC? Hmmm. I'm not quite sure how to do that. Would I just make a payment for the amount of the loan using that CC and then pay it off before the interest expires? I could do that. I don't know though. I already have 5 paid off cards and one no interest with a little over $800 left with the no-interest going up to 14% in July of '16. I'm not sure if I want to apply for another card at least not right now. But that is a good suggestion Diane. I have a PLUS loan that I'm making the payments for with around 1800 left on it at 8.5% that I'm planning to pay off with my tax refund. Maybe I could put that on a no interest card? Although I've heard that some student loan companies won't let you pay it with a cc. Is that true?

WTF? Why wasn't the PLUS loan listed in your first post?

Please restart and list ALL of your debts, with interest rate, one per line.

Debt 1, $3000 @ 9.9%
Debt 2, $10,500 @ 6.8%

Et cetera.

K-ice

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Re: Which Loan Should I Focus on Paying First?
« Reply #19 on: November 08, 2015, 10:10:14 PM »
Follow PARedbeard's advice.

But you must list ALL your debts.

This calculator is great!

http://www.vertex42.com/Calculators/debt-reduction-calculator.html

Try it out with different scenarios & let me know if you have any questions.

Let us all know how excited you are, and how much interest you will save with a plan vs. just the minimum payments :)


AmandaS1989

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Re: Which Loan Should I Focus on Paying First?
« Reply #20 on: November 09, 2015, 06:38:55 AM »
TomTX, I will post everything tonight when I get home and have more time. I originally didn't include the PLUS loan because its in my Dad's name and I made the payments due to the agreement we made in my Freshman year. I can see that it was stupid not to list it as I am paying for it. I'm hoping to pay this one off however, come tax time and have that $105.53 per month to pay on my other loans.

K-ice thank you for the calculator. I will input everything tonight when I get home. I probably won't be able to post until around 7:30 pm though.

I am excited at the thought of having a clear plan to get this monkey off of my back. I have around $80-$100 surplus from this paycheck I can use to throw at the loan I select. I'm hoping I'll have a little more than that from my next check on the 16th.

Does anyone think I should post a full case study? That might give me (and everyone else) a clearer picture.

PARedbeard

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Re: Which Loan Should I Focus on Paying First?
« Reply #21 on: November 09, 2015, 07:14:56 AM »
Why not? A full case study can only get you more info and more options. This community is pretty amazing, and I'm sure you'll get lots of good input.

AmandaS1989

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Re: Which Loan Should I Focus on Paying First?
« Reply #22 on: November 09, 2015, 01:59:33 PM »
I think I'll do that then. Hopefully I can get it out tonight.

nakedput

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Re: Which Loan Should I Focus on Paying First?
« Reply #23 on: November 09, 2015, 02:15:40 PM »
on the topic of this, I have two loans with the same interest rates but different balances. I believe 1 loan has a balance of 8k and carries a 3.5% interest rate. The other one has a balance of 5k. How do you recommend I split the payments? These payments are for student loans, so it is mandatory to make a payment on each one per month.

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Re: Which Loan Should I Focus on Paying First?
« Reply #24 on: November 09, 2015, 02:21:17 PM »
First off, 3.5% interest is low enough that the math generally favors investing over aggressive repayment of the loans. If you want to disregard the math and get to debt-free status regardless, you might want to prioritize the loan with a lower balance. You'll pay the same amount of interest either way, but getting rid of one loan means you only need to make one minimum payment in the event that something changes about your situation and you have less cash available each month for loan repayments. By prioritizing the smaller loan you'll get into the situation of only having one required payment that much sooner.

AmandaS1989

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Re: Which Loan Should I Focus on Paying First?
« Reply #26 on: November 12, 2015, 03:31:24 AM »
These payments are for student loans, so it is mandatory to make a payment on each one per month.

Just for the avoidance of doubt. Regardless of how you choose to prioritise overpaying your loans, you pay the necessary minimums on all the loans all the time, and put all the excess towards the highest priority (highest interest) loan. If you only need to make any payment to avoid charges, then set up a $1 payment (automatically if possible) on all your loans.

If the interest rates are equal and both are fixed rate with the same conditions, I would pay the smaller loan as it is slightly less admin and you generally get to having less commited spend per month more quickly.