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Student Loan Planning/Strategy
Posted on 12/24/14 at 5:48 pm
Posted on 12/24/14 at 5:48 pm
Graduated in May, so I've recently started paying them back. I currently have loans that are in five groups and am using Nelnet to pay them off. The groups are (roughly):
A: $4,300 at 6.8% (Unsub Stafford)
B: $2,500 at 6.8% (Unsub Stafford)
C: $7,500 at 6.8% (Unsub Stafford)
D: $5,500 at 3.4% (Sub Stafford)
E: $5,500 at 3.9% (Sub Stafford)
Right now, about $284/month is automatically deducted from my checking account (this is monthly payment, and the amount that would pay off the loans, including interest, in 10 years). This amount of money is proportionally divided between the groups based on a combination of both principal balance and interest rate (i.e. C gets the most, then E, D, A, B).
However, I have also been chipping away more often at A, B and C (especially C) with my own payments. I've come up with a plan to pay $100/week (in addition to the $284/month). I've broken it down to $85/week for C, $10/week for A and $5/week for B (it's enough to knock out interest each time in A & B, plus a little extra). I'm even planning on paying it twice a week to alleviate interest even further, so it will break down to $42.50 for C, $5 for A, $2.50 for B. Once C eventually gets down to A's level, then I will shift it to about $48/week each for A & C and then $33/week each when A, B and C are all about the same.
Right now, I make low 40s so things would be pretty tight, but I'm pretty frugal. In about a year, I will make low 50s. I plan on staying at this job until late July/August 2017, then either going to grad school (probably an MBA, but only if it's a top-25 school, barring a few exceptions) or moving on to another job. Obviously, things can change, new opportunities can open or new passions can arise, etc., but this is the general plan. This way, I can have A-C completely off the books by summer 2017 and defer D and E while in grad school if I go that route.
So the first question is very broad: Does this sound like a good plan?
But in addition to that, I was thinking about stopping my automatic payments altogether, because some of that goes to D & E, and just taking that extra money and investing/saving/throwing it at only A, B and C, and then chip away at D and E after A-C are completely paid off. Should I do this instead (I may not even be allowed to do this, as I don't know if each group requires its own monthly payment or not. I'm new to this stuff, haha)? Obviously, if I have to pay a certain amount to D & E each month, then just let me know and then ignore this paragraph and focus on the earlier part of the post.
A: $4,300 at 6.8% (Unsub Stafford)
B: $2,500 at 6.8% (Unsub Stafford)
C: $7,500 at 6.8% (Unsub Stafford)
D: $5,500 at 3.4% (Sub Stafford)
E: $5,500 at 3.9% (Sub Stafford)
Right now, about $284/month is automatically deducted from my checking account (this is monthly payment, and the amount that would pay off the loans, including interest, in 10 years). This amount of money is proportionally divided between the groups based on a combination of both principal balance and interest rate (i.e. C gets the most, then E, D, A, B).
However, I have also been chipping away more often at A, B and C (especially C) with my own payments. I've come up with a plan to pay $100/week (in addition to the $284/month). I've broken it down to $85/week for C, $10/week for A and $5/week for B (it's enough to knock out interest each time in A & B, plus a little extra). I'm even planning on paying it twice a week to alleviate interest even further, so it will break down to $42.50 for C, $5 for A, $2.50 for B. Once C eventually gets down to A's level, then I will shift it to about $48/week each for A & C and then $33/week each when A, B and C are all about the same.
Right now, I make low 40s so things would be pretty tight, but I'm pretty frugal. In about a year, I will make low 50s. I plan on staying at this job until late July/August 2017, then either going to grad school (probably an MBA, but only if it's a top-25 school, barring a few exceptions) or moving on to another job. Obviously, things can change, new opportunities can open or new passions can arise, etc., but this is the general plan. This way, I can have A-C completely off the books by summer 2017 and defer D and E while in grad school if I go that route.
So the first question is very broad: Does this sound like a good plan?
But in addition to that, I was thinking about stopping my automatic payments altogether, because some of that goes to D & E, and just taking that extra money and investing/saving/throwing it at only A, B and C, and then chip away at D and E after A-C are completely paid off. Should I do this instead (I may not even be allowed to do this, as I don't know if each group requires its own monthly payment or not. I'm new to this stuff, haha)? Obviously, if I have to pay a certain amount to D & E each month, then just let me know and then ignore this paragraph and focus on the earlier part of the post.
7
Posted on 12/24/14 at 6:00 pm to Buckeye Fan 19
I'd make minimum payments and put any extra money you have laying around into a Roth IRA and invest it
You can get a minor tax break on interest paid on student loans and you'll get a nice tax benefit of putting the money in the IRA
The interest rate on those loans isn't high enough to justify being in a huge rush to pay them off IMO since you could probably beat those rates with a fairly low risk investment strategy.
If they were really high credit card rates like 18% or something I'd be telling you something different.
You can get a minor tax break on interest paid on student loans and you'll get a nice tax benefit of putting the money in the IRA
The interest rate on those loans isn't high enough to justify being in a huge rush to pay them off IMO since you could probably beat those rates with a fairly low risk investment strategy.
If they were really high credit card rates like 18% or something I'd be telling you something different.
Posted on 12/24/14 at 7:48 pm to Buckeye Fan 19
I would definitely not stop auto payments. Usually you get a small interest rate deduction. Aso each loan is considered as separate mandatory payment, they just add them up for you into one payment.
284/month is nothing, I pay almost 7 times that a month.... Want to trade, haha. I've read if you make 4 extra payments a year then you can knock total loan payment term in half but I've never done the math and I can't afford 4 extra payments per year. So I'm still stuck being a slave to the government
284/month is nothing, I pay almost 7 times that a month.... Want to trade, haha. I've read if you make 4 extra payments a year then you can knock total loan payment term in half but I've never done the math and I can't afford 4 extra payments per year. So I'm still stuck being a slave to the government
Posted on 12/24/14 at 8:14 pm to Buckeye Fan 19
Might not be the proper "money board" response, but I would pay the minimum for 10 years. If your income rises as expected, you will laugh at worrying about a 300 dollar obligation per month around years 6-10. Just don't do anything stupid like leasing a luxury car, and start the savings.
This post was edited on 12/24/14 at 8:17 pm
Posted on 12/24/14 at 9:14 pm to Ric Flair
I'm about to be engaged and I'm absolutely petrified to look at my fiance's student loans. It's something we have brought up, but I haven't fully dove into it and seen what the situation is.
I will give her credit though, she took less classes this past summer and worked her arse off. Although she took loans out for the first 2.5 years of school, the last 4 semesters she should be able to pay in full without loans.
I will give her credit though, she took less classes this past summer and worked her arse off. Although she took loans out for the first 2.5 years of school, the last 4 semesters she should be able to pay in full without loans.
Posted on 12/24/14 at 10:25 pm to LSUShock
If you are eligible, look at CommonBond or SoFi. They have much better rates, but they only loan to alumni of certain schools.
Posted on 12/25/14 at 10:57 am to Buckeye Fan 19
It seems to me that you at least have a plan, and that in itself is a great start.
I know I'll get laughed at for saying this, but dave Ramsey's plan would work best here. I'd do the snowball. Pay minimum payments on all the loans except the lowest balance loan. Pay the crap out of that small loan, and when it's gone, hammer the next smallest loan, and so on.
Havin students loans is not "a normal thing that you just learn to live with." They suck, and they need to be out of your life. Your plan sounds ok, just don't ever settle into the minimum payment route. Keep it up.
I know I'll get laughed at for saying this, but dave Ramsey's plan would work best here. I'd do the snowball. Pay minimum payments on all the loans except the lowest balance loan. Pay the crap out of that small loan, and when it's gone, hammer the next smallest loan, and so on.
Havin students loans is not "a normal thing that you just learn to live with." They suck, and they need to be out of your life. Your plan sounds ok, just don't ever settle into the minimum payment route. Keep it up.
Posted on 12/25/14 at 11:11 am to jacquespene8
quote:
I know I'll get laughed at for saying this, but dave Ramsey's plan would work best here
Well the smaller debts have the highest interest rates so it would work by default
Posted on 12/25/14 at 11:35 am to Powerman
quote:
quote:
I know I'll get laughed at for saying this, but dave Ramsey's plan would work best here
Well the smaller debts have the highest interest rates so it would work by default
Right, except C which is the largest loan, which OP is attacking the hardest, apparently. C would be the last debt I would focus on.
Posted on 12/25/14 at 9:45 pm to jacquespene8
Dave Ramsey's advice:
1-Get an extra job on the weekend or on week nights. Take the money you earn on 2nd job and put it towards the smallest loan until you pay it off . Then repeat .
2- Do not go back to school until you pay off the school loans and can pay cash for school.
3-Do not invest until school loans are paid off.
1-Get an extra job on the weekend or on week nights. Take the money you earn on 2nd job and put it towards the smallest loan until you pay it off . Then repeat .
2- Do not go back to school until you pay off the school loans and can pay cash for school.
3-Do not invest until school loans are paid off.
Posted on 12/25/14 at 11:13 pm to Buckeye Fan 19
My fiance and I used the Dave Ramsey Method to knock out her Student Loans. 10 year plan just like yours. We paid 19k off in just 6 months. We did have some savings that we used and I worked a TON of OT for extra cash but its such a huge burden lifted off of us.
B: $2,500 at 6.8% (Unsub Stafford)
A: $4,300 at 6.8% (Unsub Stafford)
E: $5,500 at 3.9% (Sub Stafford)
D: $5,500 at 3.4% (Sub Stafford)
C: $7,500 at 6.8% (Unsub Stafford)
This is the order that I would make the payments based on what we have already done.
Take your $100/wk and start on the $2500 loan.
If your normal monthly payment for this loan is $20 (just guessing), then you would be paying $420/mo on this loan and would have it paid off in 6 months.
Then take that 420 and add it to the next loan, which in this case is 4300.
Im guessing the minimum payment for that one is $50-$60, so you would then be paying $480/mo on the 2nd loan. If your balance on this loan has stayed the same b/c of just making minimum payments, you can have it paid off in an additional 9 months.
Keep adding your $400 + minimum payments to the next loan, etc etc till they are all gone.
if you can add more than the $400 it really speeds up the process.
I would highly recommend the debt snowball based on personal experience.
We've also paid off an $8000 personal loan that I had taken out by continuing the payments we were making on her loans.
B: $2,500 at 6.8% (Unsub Stafford)
A: $4,300 at 6.8% (Unsub Stafford)
E: $5,500 at 3.9% (Sub Stafford)
D: $5,500 at 3.4% (Sub Stafford)
C: $7,500 at 6.8% (Unsub Stafford)
This is the order that I would make the payments based on what we have already done.
Take your $100/wk and start on the $2500 loan.
If your normal monthly payment for this loan is $20 (just guessing), then you would be paying $420/mo on this loan and would have it paid off in 6 months.
Then take that 420 and add it to the next loan, which in this case is 4300.
Im guessing the minimum payment for that one is $50-$60, so you would then be paying $480/mo on the 2nd loan. If your balance on this loan has stayed the same b/c of just making minimum payments, you can have it paid off in an additional 9 months.
Keep adding your $400 + minimum payments to the next loan, etc etc till they are all gone.
if you can add more than the $400 it really speeds up the process.
I would highly recommend the debt snowball based on personal experience.
We've also paid off an $8000 personal loan that I had taken out by continuing the payments we were making on her loans.
This post was edited on 12/25/14 at 11:16 pm
Posted on 12/26/14 at 7:37 am to pakowitz
Not a fan of paying off stu loan debt to the exclusion of building up a cash reserve and doing a retirement contribution. OP has just $25k in debt: that's equivalent in dollars to car, or a tiny starter house. stu loan debt isn like consumer debt--depending on your income, some of the interest paid is tax deductible.
First off, investigate the loan forgiveness options offered by the govt. certain kinds of jobs (teaching, public service for a government entity, work for a 501c3 nonprofit, including most universities, etc) may qualify you for a loan forgiveness program. If you are qualified, you make 120 minimum payments, then the balance is forgiven.
Second, figure out how much cash you can devote to debt payment, to establishing a cash reserve, and to a retirement contribution. Don't completely neglect any one category over the other. Sure, pay on those loans, but it is equally important to save for retirement, especially while you're young. It is also good fiscal discipline to learn to balance multiple smaller goals, rather than blindly flail at one big symbolic one (those stu loans) while ignoring other important aspect of your financial well being (your emergency cash and retirement; with a Roth IRA, the retirement cash and cash reserve can be in the same account).
Debt isn't a disease....lack of self discipline is. Don't run up unnecessary consumer debt at this point (car, house, stuff), keep plugging away while saving for emergencies and retirement, and it will all be paid down in a few years.
First off, investigate the loan forgiveness options offered by the govt. certain kinds of jobs (teaching, public service for a government entity, work for a 501c3 nonprofit, including most universities, etc) may qualify you for a loan forgiveness program. If you are qualified, you make 120 minimum payments, then the balance is forgiven.
Second, figure out how much cash you can devote to debt payment, to establishing a cash reserve, and to a retirement contribution. Don't completely neglect any one category over the other. Sure, pay on those loans, but it is equally important to save for retirement, especially while you're young. It is also good fiscal discipline to learn to balance multiple smaller goals, rather than blindly flail at one big symbolic one (those stu loans) while ignoring other important aspect of your financial well being (your emergency cash and retirement; with a Roth IRA, the retirement cash and cash reserve can be in the same account).
Debt isn't a disease....lack of self discipline is. Don't run up unnecessary consumer debt at this point (car, house, stuff), keep plugging away while saving for emergencies and retirement, and it will all be paid down in a few years.
Posted on 12/26/14 at 8:27 am to hungryone
quote:
Debt isn't a disease....lack of self discipline is. Don't run up unnecessary consumer debt at this point (car, house, stuff), keep plugging away while saving for emergencies and retirement, and it will all be paid down in a few years.
Yeah...that's why I made the comments I made in my first response. This isn't stupid high interest debt.
Take advantage of the tax code and pay the minimum and start saving for retirement with an IRA.
Posted on 12/26/14 at 9:03 am to Buckeye Fan 19
What about consolidation at a lower overall rate? The rates will never be lower than they are now.
This post was edited on 12/27/14 at 12:02 am
Posted on 12/26/14 at 9:25 am to LSUJay13
Consolidation (which should really be called refinancing) can affect the loan interest tax deductibility. Unless your rates are significantly higher than the refi rates, it's not very useful.
Posted on 12/26/14 at 1:01 pm to hungryone
Thanks for all the advice, everyone. Lots of things to think about and I appreciate them.
I'm a Fed employee (yeah, I know... Working in the public sector is not something I want to do long-term, but the job is a really good one for a first job and in an area that I think the Fed gov't is beneficial) so I definitely have looked into the student loan forgiveness, but it doesn't seem like a reasonable option (unless I stay for awhile which, again, is not something I want to do). The interest tax deduction is interesting, and something I didn't know.
I would be fine with paying the minimum monthly payments if I wasn't thinking about grad school. But since it seems (based on the job I'm in and my general planned timeline) I want to shoot for it in August 2017, I'd like to have at least the 6.8% payments gone by then so the interest isn't accumulating on those while I'm in school. I currently put in 5% to a TSP (sort of like the gov't version of a 401(k)) and it's matched up to 4%. Should I still invest more in a separate Roth IRA?
And lastly, I'm curious about the posters saying I should attack B first. My rationale was to try to reduce C quickly in order to lower interest. For those saying to go after B to get rid of it, is that more just for a peace of mind/psychological benefit, or is there a tangible reason?
Again, thank you, everyone.
I'm a Fed employee (yeah, I know... Working in the public sector is not something I want to do long-term, but the job is a really good one for a first job and in an area that I think the Fed gov't is beneficial) so I definitely have looked into the student loan forgiveness, but it doesn't seem like a reasonable option (unless I stay for awhile which, again, is not something I want to do). The interest tax deduction is interesting, and something I didn't know.
I would be fine with paying the minimum monthly payments if I wasn't thinking about grad school. But since it seems (based on the job I'm in and my general planned timeline) I want to shoot for it in August 2017, I'd like to have at least the 6.8% payments gone by then so the interest isn't accumulating on those while I'm in school. I currently put in 5% to a TSP (sort of like the gov't version of a 401(k)) and it's matched up to 4%. Should I still invest more in a separate Roth IRA?
And lastly, I'm curious about the posters saying I should attack B first. My rationale was to try to reduce C quickly in order to lower interest. For those saying to go after B to get rid of it, is that more just for a peace of mind/psychological benefit, or is there a tangible reason?
Again, thank you, everyone.
Posted on 12/26/14 at 2:34 pm to Buckeye Fan 19
Paying off B first is both psychological and tangible. When you get B paid off, you feel the win, but also you have one less minimum payment to worry about. Your momentum then rolls into the other loans. It makes sense, but it works better for someone who REALLY wants to be done with debt. If you're looking for ways to have the loans be "manageable" over the long term, then the snowball may not be your best bet. You'd be better off concentrating on deductions and refinancing to save interest.
Posted on 12/26/14 at 3:59 pm to Buckeye Fan 19
Just select income based payment, I did when I was making 41k a year and it dropped my payments from 380 to 190 and helped me a ton.
Posted on 12/26/14 at 5:31 pm to tduecen
If you are already enrolled in a thrift savings plan with the govt, then good for you. Make sure you are maxing out the match funds or you are leaving free money on the table.
Depending on your tax circumstances, you may be better served with a traditional IRA. The trad IRA can't be touched until retirement without penalties, BUT it is potentially deductible on your 1040 (depending on your income levels).
The benefit to the Roth is liquidity: all contributions can be withdrawn at any point (earnings must stay in until retirement, but they are tax free when withdrawn). So you can treat it like a savings account of sorts.
The larger point is this: the earlier you can start saving, the better. Market advantages (earnings) are better over the longest term possible, generally speaking. Don't wait until you feel comfortable or secure to start saving for retirement. Build it into your budget as a non negotiable thing.
Think of it like this: your retirement savings are more important than cable, high speed internet, or a cell phone. Don't go paying for all of those until you pay yourself (retirement savings) first.
Depending on your tax circumstances, you may be better served with a traditional IRA. The trad IRA can't be touched until retirement without penalties, BUT it is potentially deductible on your 1040 (depending on your income levels).
The benefit to the Roth is liquidity: all contributions can be withdrawn at any point (earnings must stay in until retirement, but they are tax free when withdrawn). So you can treat it like a savings account of sorts.
The larger point is this: the earlier you can start saving, the better. Market advantages (earnings) are better over the longest term possible, generally speaking. Don't wait until you feel comfortable or secure to start saving for retirement. Build it into your budget as a non negotiable thing.
Think of it like this: your retirement savings are more important than cable, high speed internet, or a cell phone. Don't go paying for all of those until you pay yourself (retirement savings) first.
Posted on 12/26/14 at 11:04 pm to hungryone
quote:
Consolidation (which should really be called refinancing) can affect the loan interest tax deductibility. Unless your rates are significantly higher than the refi rates, it's not very useful.
I guess these guys know it all. Not!
I had mutiple student loans from the early 90's that I was able to do a one time consolidation with my lending company at the time (Sallie Mae) and was able to keep it as a student loan with an overall reduction in interest rates. At the time my reduction amounted to a 6% rate, but that was a good rate at the time. If I were you I would call your lender and ask about combining your loans with an overall lower percentage rate now that you are out of school. I promise it is possible, regardless of what these guys say. Think about how much you could save if all of your loans were at 3% or close to it with no penalty.
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