Student Loans: advice

[Anivair]

i'm just starting to repay my student loans. Apart from how upsetting I consider the whole idea of student loans (I don't know about you all, but when i went to college way back in 1996 I feel like it was a sort of predatory situation in which i got ripped off a lot) I'm struggling to find good tactics for making this less painful and faster. Anyone have any really good financial tips for clearing out that student loan debt?

[msuroo]

Just treat it like any other debt. Organize it all from highest to lowest interest rate - then pay off from top to bottom. It sucks if you got schemed into a high interest rate consolidation loan back when you graduated (a lot of my friends got bit by this too), but you can't let that affect your future decisions.

[Gainsdalf the Whey]

Because my credit was actually better when I graduated, my consolidation actually brought by interest rate down, so do that if it is to your benefit. If not, pay off the highest rate first and work your way down, even if the highest rate loan is the largest. My wife and I have 4-5 between us and this is how we're doing it. You'll pay the least in the long run. If by some miracle some loan interest rates are lower than your mortgage (if you have one), pay the mortgage down first. It's just another loan.

This is not to say "don't have a savings, pay loans down with all your extra money". Don't do that. Pay the minimum on your loans and first build up an emergency fund to pay your bills if something happens. I see 6-8 months touted a lot, but I think it's a bit much. I tend to aim for 3-4 months of emergency funds. Shit happens, I recently had to put over a grand into my car for example. Once you have that, then put the extra money toward the loans or replenishing the emergency funds if some has to be used. Always have a set minimum in your emergency fund (3-4 months of bills in my opinion).

You'll see some people talk about the snowball method where you pay off the loans with the smallest principle (total amount of loan) first, regardless of interest rate. Doing it this way will have you pay more by the time you pay off the loans than the above method, but you will see individual loans get paid off earlier. This has a mental benefit of seeing a reward earlier and helping you keep at it, but most of us nerds here who have math skillz will not benefit from this as much as paying less in the long run, which is a bigger reward in my mind.

[msuroo]

So yeah, Corey said it a lot better than I did. In the end, it doesn't matter what the money was borrowed for, all that matters is what you owe, and what the interest rate is. Paying off high interest balances first (regardless of the outstanding principal) will ultimately result in the fastest repayment/smallest cash outlay.

I'm fortunate since most of my student loans are Stafford loans which were eligible for zero interest after 36 months. I don't pay a penny above the minimum on those .

[WizardTrip]

You'll see some people talk about the snowball method where you pay off the loans with the smallest principle (total amount of loan) first, regardless of interest rate. Doing it this way will have you pay more by the time you pay off the loans than the above method, but you will see individual loans get paid off earlier. This has a mental benefit of seeing a reward earlier and helping you keep at it, but most of us nerds here who have math skillz will not benefit from this as much as paying less in the long run, which is a bigger reward in my mind.

For me, I put the focus on the loan with the smallest principle once it reaches a certain point. It makes the most sense to aim for the highest interest rates first, but once the amount of a loan hits that "I can pay that off in X months" (where X is very close and/or before a significant event, etc), I switch to take that one out because it builds a sense of accomplishment in me. I just did this with my student loans when I realized I only had $3,000 more to go, and now it will be paid off next month!

Anivair, all this advice is solid! It's a loan/debt that is owed and needs to be paid down. Pay at it as much as you can, but follow Corey's advice and make sure you are comfortably safe financially too. Also, if you have any other debt that you are paying off (with higher rates), follow the advice given and pay that off first, but once that is done, move the full amount of that monthly payment over to this loan (or the next loan in priority). This way, your cash going out won't change and that next debt will be paid quicker. It's easy to think "Ooh...I have an extra $300/mo now that I paid that off!", but if you keep the mindset that you are still having to pay out that $300/mo, it will benefit better in the long run.

[Hammlin]

I consolidated them all through sallie mae and got a killer (IMO) 2.8% rate. that baby's going to be the last one to go, and it will be a sweet sweet day, as my car is the only thing left in front of it

Good luck to you!!! Shop around!

[joeyb]

There are two schools of thought here. The first is to pay the loan with the highest interest rate off first. In the long run, this will save you money. The second is to pay the smallest loan off first. The goal is to free up as much money as possible in case something bad happens. For example, let's say that you have $50 extra per month that you are willing to put toward paying down your loans. If you put that $50 toward the highest interest loan, you will end up paying on that one for years (assuming that your highest interest loan is one of your largest) before you have anything to really show for it. However, if you put it toward your smallest loan first, you might pay that one off after a year. Now, you can redirect the $50 and the minimum payment for the loan you just paid off toward your next smallest loan. Let's say that loan get's paid off after 10 months, now you can redirect that payment and the other money to your third loan. The benefit here is that if you were to be laid off or find yourself unable to work for whatever reason, you can now take all of that money from the loans that you paid off and use it toward your bills. If you put it toward your highest interest loan, you aren't going to be freeing up money as soon, but will you pay off your debt sooner. It kind of just depends on what is important to you.

[aj_rock]

This is all good advice, but it doesn't take tax breaks into account either. Typically, government backed student loans (depening on where you live... YMMV) get huge tax breaks, and you get a significant chunk of the money you spent on paying down the student loan back during tax season.

Mind you, I found this out AFTER I paid off my student debt lump sum; after doing the number crunching, I could have earned back about 40% of the loan's worth in taxes.

... vkljdfgjklsdfhglsdfjk.

[msuroo]

There are two schools of thought here. The first is to pay the loan with the highest interest rate off first. In the long run, this will save you money. The second is to pay the smallest loan off first. The goal is to free up as much money as possible in case something bad happens. For example, let's say that you have $50 extra per month that you are willing to put toward paying down your loans. If you put that $50 toward the highest interest loan, you will end up paying on that one for years (assuming that your highest interest loan is one of your largest) before you have anything to really show for it. However, if you put it toward your smallest loan first, you might pay that one off after a year. Now, you can redirect the $50 and the minimum payment for the loan you just paid off toward your next smallest loan. Let's say that loan get's paid off after 10 months, now you can redirect that payment and the other money to your third loan. The benefit here is that if you were to be laid off or find yourself unable to work for whatever reason, you can now take all of that money from the loans that you paid off and use it toward your bills. If you put it toward your highest interest loan, you aren't going to be freeing up money as soon, but will you pay off your debt sooner. It kind of just depends on what is important to you.

*Shrug* I still agree with Corey - emergency fund first. High interest debt next. Paying off small principal debt with the plan of using those future cashflows as your emergency fund seems ill-fated.

[WizardTrip]

This is all good advice, but it doesn't take tax breaks into account either. Typically, government backed student loans (depening on where you live... YMMV) get huge tax breaks, and you get a significant chunk of the money you spent on paying down the student loan back during tax season.

Mind you, I found this out AFTER I paid off my student debt lump sum; after doing the number crunching, I could have earned back about 40% of the loan's worth in taxes.

... vkljdfgjklsdfhglsdfjk.

All I was ever aware of was being able to write off the interest I paid on these loans, and once you hit a specific income level, you can't even do that.

[msuroo]

I could have earned back about 40% of the loan's worth in taxes.

I'm not following. You can deduct interest paid on student loans, so if you are early in the amort table with a high interest loan - yes, that can be a sizable percentage of what you paid towards your loan that year. That is never going to leave you in a spot where not paying down loans is preferable to paying them down though - effectively, it just lowers the rate.

[joeyb]

*Shrug* I still agree with Corey - emergency fund first. High interest debt next. Paying off small principal debt with the plan of using those future cashflows as your emergency fund seems ill-fated.

I agree with you, but I was just pointing out the advantage to the other strategy, which is actually very popular.

[aj_rock]

It took some finnicking about, I'll admit, but it was doable. First off, having an effectively 0% loan as icedtrip stated is the starting point. My income won't reach high enough levels to counter-act that for a while.

I also think of things in terms of percent advantage; the magnitude of difference between your loans and your investments. For example, say you have a loan at 8% and an investment that's currently returning 9%, you have a 1% advantage by KEEPING the loan; if the investment money wasn't locked in, hell you'd probably borrow as much as possible and go all in for the investment. This is doable with larger sums of money.

Secondly, I also had quite a bit of parental assistance with my student loans, hence the lump sum pay-off. However, we currently had an investment returning at 8%, while student loan rate was around 6%. We got a 2% advantage, but didn't realize that we could have effectively zeroed out the student loan, increasing the advantage to 8%. Over a sufficiently long time period (can't remember what it was, but it wasn't ridiculous or anything), it worked out to around 40%.

The only point I was trying to make is that there are often tools at your disposal that can finnick your interest numbers around a lot... It bears worth scrutinizing different alleys of repayment, even if it takes a bit more effort than comparing interest rates.

[Gainsdalf the Whey]

I also think of things in terms of percent advantage; the magnitude of difference between your loans and your investments. For example, say you have a loan at 8% and an investment that's currently returning 9%, you have a 1% advantage by KEEPING the loan; if the investment money wasn't locked in, hell you'd probably borrow as much as possible and go all in for the investment. This is doable with larger sums of money.

Secondly, I also had quite a bit of parental assistance with my student loans, hence the lump sum pay-off. However, we currently had an investment returning at 8%, while student loan rate was around 6%. We got a 2% advantage, but didn't realize that we could have effectively zeroed out the student loan, increasing the advantage to 8%. Over a sufficiently long time period (can't remember what it was, but it wasn't ridiculous or anything), it worked out to around 40%.

If you have investments returning at that rate with a high rate of success, yes, you should be borrowing as much as you can. Where the hell did you find that?

[msuroo]

It took some finnicking about, I'll admit, but it was doable. First off, having an effectively 0% loan as icedtrip stated is the starting point. My income won't reach high enough levels to counter-act that for a while.

I also think of things in terms of percent advantage; the magnitude of difference between your loans and your investments. For example, say you have a loan at 8% and an investment that's currently returning 9%, you have a 1% advantage by KEEPING the loan; if the investment money wasn't locked in, hell you'd probably borrow as much as possible and go all in for the investment. This is doable with larger sums of money.

Secondly, I also had quite a bit of parental assistance with my student loans, hence the lump sum pay-off. However, we currently had an investment returning at 8%, while student loan rate was around 6%. We got a 2% advantage, but didn't realize that we could have effectively zeroed out the student loan, increasing the advantage to 8%. Over a sufficiently long time period (can't remember what it was, but it wasn't ridiculous or anything), it worked out to around 40%.

The only point I was trying to make is that there are often tools at your disposal that can finnick your interest numbers around a lot... It bears worth scrutinizing different alleys of repayment, even if it takes a bit more effort than comparing interest rates.

I totally agree that the rate of return on a potential investment is a variable to consider, but arbitrage opportunities aren't exactly growing on trees for your average consumer. Anything with an 8% return is going to be carrying a healthy amount of risk.

[aj_rock]

The 8% return was an existing investment, locked in and (luckily) growing at that rate. So no, we couldn't really arbitrage in an unlimited fashion, but still the situation existed where more capital could be accrued by NOT paying off a debt.

[skeach101]

Let me give you some decent advice.....

Student loan debt is NOTHING to be concerned with.

Here are a few questions I have for you. First off, do you work in the public sector or private sector? If you work in the public sector, I have some great news for you! I want you to google "ibr calculator." There is a program called Income-Based Repayment. This essentially lowers your payments to a certain percentage of your annual income. It may save you some money. You will still eventually have to pay it off though.... UNLESS you work in the public sector. If you do, your loan will be forgiven in 10 years, even on IBR. Also, there are tons of credits and forgiveness programs for certain jobs. I'm a Special Ed teacher in a low income area, so they basically PAID ME to go to school. And that isn't even mentioning the tax deductions you get from the interest.

Just some things to think about.

[Philociraptor]

I dunno, my loan interest rates are 6.9% and 7.9% (mine and my parents which I'm paying). It's serious business to pay them off quickly. They are government loans, only hope of consolidation would be to find a private loan at a lower rate (unlikely).

[dshale]

This is where the nerd kicks in. If you can figure out loan amortization and tax refunds then you should be able to tell if you can find a better rate elsewhere. Spreadsheets are your friend on this one. I am not sure about the tax laws on this but I remember I wasn't paying enough in interest to deduct it. If the rate is high you might want to see about other loan possibilities. Unfortunately it is really difficult to move a student loan around. 0% interest rates on credit cards for balance transfer typically exclude student loans from what I remember.

[ryanmercer]

Always pay more than the minimum, throw your tax refund (if any) at it each year, you can always call them and if you've been paying well consistently ask for a better interest rate (don't hold your breath though).

[msuroo]

Always pay more than the minimum, throw your tax refund (if any) at it each year, you can always call them and if you've been paying well consistently ask for a better interest rate (don't hold your breath though).

This is kind of an old thread, but whatever - I'll bite.

There's already been a few examples in this thread where not paying down a loan is the correct financial decision. For example, my student loans are 0% - why on earth would I pay those early? Here's a few things I'd rather do with extra cashflow than pay down a 0% loan:

• Pay down my mortgage
  
• Contribute towards retirement
  
• Contribute to my son's education fund
  
• Throw a party with lots of hookers and blow

Ok, maybe not that last one, but you get the idea. Most people's student loans don't exist in a vacuum, and "always" is a pretty strong word.

[ryanmercer]

This is kind of an old thread, but whatever - I'll bite.

There's already been a few examples in this thread where not paying down a loan is the correct financial decision. For example, my student loans are 0% - why on earth would I pay those early? Here's a few things I'd rather do with extra cashflow than pay down a 0% loan:

• Pay down my mortgage
  
• Contribute towards retirement
  
• Contribute to my son's education fund
  
• Throw a party with lots of hookers and blow

Ok, maybe not that last one, but you get the idea. Most people's student loans don't exist in a vacuum, and "always" is a pretty strong word.

You are lucky them, most people I know range from 6 and 11% on their student loans with repayment terms of 15-30 years. Meaning they are paying absurd amounts of interest over the lifetime of the loan. Also, not everyone has a mortgage in fact I know far more people that live in manufactured that they own outright or apartments than I do home owners. Also, not everyone has a son/daughter to put through school. OP is looking for ways to make it less painful and faster, that would be paying more than the minimum and throwing in unexpected income at them.

[msuroo]

You are lucky them, most people I know range from 6 and 11% on their student loans with repayment terms of 15-30 years. Meaning they are paying absurd amounts of interest over the lifetime of the loan. Also, not everyone has a mortgage in fact I know far more people that live in manufactured that they own outright or apartments than I do home owners. Also, not everyone has a son/daughter to put through school. OP is looking for ways to make it less painful and faster, that would be paying more than the minimum and throwing in unexpected income at them.

You're missing the point - obviously my situation is unique to me (and I don't consider being fiscally responsible "lucky"). But saying that "always paying more than the minimum" is the right answer is just patently bad advice. I know lots of childless renters too. You know who else I know a lot of? People with credit card debt. Paying a lot more than 6-11% interest. For those people, paying more than the minimum on student loans when they could be paying off credit cards is a horrible idea.

Like I said, student loans don't exist in a vacuum. It's debt just like any other - it doesn't matter what you originally borrowed the money for. You've got to consider it all together when coming up with a repayment plan. (And I'm pretty sure that's the same advice I gave when Anivair asked the question...7 months ago.)