A financial question for you

[mustang sally]

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Assuming you have money to put towards your student loans, which of these options will provide the better value:

a) Pay down grad plus loans (balance around $15,000) or
b) Pay off accumulated interest on all loans (including Stafford loans totaling >$100,000)

I just assumed paying down grad plus is a better idea because the interest rate is higher. However, after seeing how much interest has built up on my larger Stafford loan balances, now I'm not so sure.

 

[Its Z]

It would still make sense to pay off the higher interest portion of the loan first because $1 of Grad Plus is more expensive than $1 of Stafford.

 

[PumpkinSmasher]

Dave Ramsey is a great place to start for people learning to manage their finances: http://www.daveramsey.com/new/baby-steps/

 

[cycloketocaine]

Assuming you have money to put towards your student loans, which of these options will provide the better value:

a) Pay down grad plus loans (balance around $15,000) or
b) Pay off accumulated interest on all loans (including Stafford loans totaling >$100,000)

I just assumed paying down grad plus is a better idea because the interest rate is higher. However, after seeing how much interest has built up on my larger Stafford loan balances, now I'm not so sure.

It depends on how much in loans you owe and where your post-graduation job is.

 

[owlegrad]

It depends on how much in loans you owe and where your post-graduation job is.

How does it matter where your job is or what the total amount of debt is? I am pretty sure interest works the same was in every state.

If you are going to pay off loans early, it is always best to put the extra money toward the higher interest loan, like Z mentioned. Dollar for dollar, your higher interest loans are the ones that you are paying more in interest for. Pay them off first.

 

[Jabberwocky12]

Dollar for dollar, your higher interest loans are the ones that you are paying more in interest for.

I concur with this redundant statement and redundantly agree about interest.

 

[owlegrad]

I concur with this redundant statement and redundantly agree about interest.

Haha, I couldn't think of a simpler way of putting it. 😛

Do I get extra redundancy points for basically just repeating an earlier post? It adds an additional layer of redundancy, if such a thing is possible.

 

[Jabberwocky12]

Haha, I couldn't think of a simpler way of putting it. 😛

Do I get extra redundancy points for basically just repeating an earlier post? It adds an additional layer of redundancy, if such a thing is possible.

Nah, if that were the case the doomers and gloomers would get all the points. It only counts in your individual post.

 

[All4MyDaughter]

Nah, if that were the case the doomers and gloomers would get all the points. It only counts in your individual post.

LOL! If there were points for saying some variation of "Never EVER in my career have I seen such a state as pharmacy is in now! Abandon hope! Give up now! Get the the bunkers!" then a few of our posters would have MEGA points accumulated by now.

 

[p-rog]

Dollar for dollar, your higher interest loans are the ones that you are paying more in interest for. Pay them off first.

But wait! Maybe i'm just being dumb here, but I think that if the balance is 10 times higher in the lower interest rate loan, you will actually be paying much more in interest per year on that loan than the loan with the 10x lower balance and higher rate, right??

Let's crunch the numbers, shall we:

Federal loan: $15,000 X 6.8% interest = $1020 interest paid per year

Stafford loan: $100,000 X 3% interest = $3000 interest paid per year

Am I missing something?

I have approval from a CPA on this by the way.

 

[R2pharmD2]

But wait! Maybe i'm just being dumb here, but I think that if the balance is 10 times higher in the lower interest rate loan, you will actually be paying much more in interest per year on that loan than the loan with the 10x lower balance and higher rate, right??

Let's crunch the numbers, shall we:

Federal loan: $15,000 X 6.8% interest = $1020 interest paid per year

Stafford loan: $100,000 X 3% interest = $3000 interest paid per year

Am I missing something?

Yes. As you pay down your loan, the amount of interest you pay will decrease too. Paying down the loan with the higher interest rate will cause a greater decrease in how much interest you're paying. Your logic assumes that you could pay off either loan in an equal amount of time, which isn't true.

 

[Jabberwocky12]

But wait! Maybe i'm just being dumb here, but I think that if the balance is 10 times higher in the lower interest rate loan, you will actually be paying much more in interest per year on that loan than the loan with the 10x lower balance and higher rate, right??

Let's crunch the numbers, shall we:

Federal loan: $15,000 X 6.8% interest = $1020 interest paid per year

Stafford loan: $100,000 X 3% interest = $3000 interest paid per year

Am I missing something?

I have approval from a CPA on this by the way.

Image you pay off 15k in a year starting off. And lets say that you paid it all off in January to prevent any kind of interest accumulating that year.

Lets say the federal loan was paid off- 1020 interest saved
If you paid 15k off the stafford- you save about 450 dollars

Remember it's interest per dollar, not interest per total loan value that really matters

 

[Its Z]

But wait! Maybe i'm just being dumb here, but I think that if the balance is 10 times higher in the lower interest rate loan, you will actually be paying much more in interest per year on that loan than the loan with the 10x lower balance and higher rate, right??

Let's crunch the numbers, shall we:

Federal loan: $15,000 X 6.8% interest = $1020 interest paid per year

Stafford loan: $100,000 X 3% interest = $3000 interest paid per year

Am I missing something?

I have approval from a CPA on this by the way.

You can't look at it that way.

You have to compare the same amount of principle with different interest rates, even though true amortization interest accrual doesn't work as you displayed (straight calculation), for the sake of this discussion, let's use it.

$15,000 X 3% = $450 interest per year
$15,000 X 6.8% = $975 interest per year

 

[Its Z]

Another way of looking at it is that for $15,000 loan on a 10 year repayment term, here are the interests amortized.

3%: $2,380 in total interest
6.5% $5,438 in total interest

 

[Its Z]

Another example..so if you won a jackpot and after taxes, you're left with $15,000. Which portion of the loans would you pay off first?

Equally divided between grad plus and stafford? grad plus? or Stafford?

Whichever loan that has the higher interest rate.

 

[Its Z]

I must be really bored. But here's one to nail the coffin.

1. Pay off the $15,000 Grad Plus Today...keep the $100,000 Stafford at 3% for 10 years. Total Payment = $130,872.

2. Pay off $15,000 portion of $100,000 stafford and keep the remaining $85,000 at 3% then keep the $15,000 Grad Plus for 10 years at 6.5%. Total Payment = $166,754.

 

[owlegrad]

But wait! Maybe i'm just being dumb here, but I think that if the balance is 10 times higher in the lower interest rate loan, you will actually be paying much more in interest per year on that loan than the loan with the 10x lower balance and higher rate, right??

Let's crunch the numbers, shall we:

Federal loan: $15,000 X 6.8% interest = $1020 interest paid per year

Stafford loan: $100,000 X 3% interest = $3000 interest paid per year

Am I missing something?

I have approval from a CPA on this by the way.

Fire your CPA.

 

[Its Z]

Better yet, buy $15,000 worth of OPTR and come May when fidaxomicin gets the FDA approval, it'll probably be $30,000+.... pay some tax on it and pay off more loans!

 

[mustang sally]

Thanks for all of the advice, guys. My initial thought was to pay down the Grad Plus, but then seeing all the interest that the Stafford loans are generating kind of freaked me out.

I don't know what kind of old interest rates p-rog is using, but I could only wish those were my rates. 🙂

 

[willrocks]

I would not ask for advice on repaying loans on this message board. Many people adopt the common fallacy that repaying loans promptly is the best way to go (not the case). Seek a financial advisor who can uniquely advise you. You can afford it, and long term, it is worth it.

Example:

Every dollar you pay back in loans is one dollar less to invest. The average return on the stock market over the past twenty odd years is ~10%. In that sense, you are essentially breaking if you choose to wait to pay back your loans.

Further, if you repay the loans instead of properly investing it, you won't have any liquid cash should an emergency or business opportunity (i.e. an independent selling out) come up.

Or, look at it this way: paying back your loans promptly will have you living closer to paycheck-to-paycheck than paying the bank back over time. Unless you have private loans with strict repayment requirements, a sound reasoning is to pay back uncle sam with time. You have little to gain by paying it back asap (10 year repayment).


And please, seek a financial advisor. A couple hundred dollars for quality advice is a pittance compared to your paycheck and mass of debt, and trumps the advice you will find for free anywhere else. My thoughts above only served to possibly open you to the notion that other perspectives exist.

 

[Its Z]

I would not ask for advice on repaying loans on this message board.

Then he goes on and gives financial advice.

Example:

Every dollar you pay back in loans is one dollar less to invest. The average return on the stock market over the past twenty odd years is ~10%. In that sense, you are essentially breaking if you choose to wait to pay back your loans.

Sorry to burst your financial bubble but S&P500 Index returned Zero % counting inflation past 10 years.

Further, if you repay the loans instead of properly investing it, you won't have any liquid cash should an emergency or business opportunity (i.e. an independent selling out) come up.

And if you don't pay back the loan, interest will compound and accrue.

Or, look at it this way: paying back your loans promptly will have you living closer to paycheck-to-paycheck than paying the bank back over time. Unless you have private loans with strict repayment requirements, a sound reasoning is to pay back uncle sam with time. You have little to gain by paying it back asap (10 year repayment).

How is $2,000 per month repayment on loan amount to pay check to pay check on $5,000 per month take home?

And please, seek a financial advisor. A couple hundred dollars for quality advice is a pittance compared to your paycheck and mass of debt, and trumps the advice you will find for free anywhere else. My thoughts above only served to possibly open you to the notion that other perspectives exist.

yeah..financial advisor... answer to everything.

 

[owlegrad]

...
Every dollar you pay back in loans is one dollar less to invest. The average return on the stock market over the past twenty odd years is ~10%. In that sense, you are essentially breaking if you choose to wait to pay back your loans.

Further, if you repay the loans instead of properly investing it, you won't have any liquid cash should an emergency or business opportunity (i.e. an independent selling out) come up.

Or, look at it this way: paying back your loans promptly will have you living closer to paycheck-to-paycheck than paying the bank back over time. Unless you have private loans with strict repayment requirements, a sound reasoning is to pay back uncle sam with time. You have little to gain by paying it back asap (10 year repayment).


...

Until your investments tank and you have no cash and no way to pay back your loans. At least if you are debt free you have less to lose should your investments not pan out.

 

[Its Z]

Or, look at it this way: paying back your loans promptly will have you living closer to paycheck-to-paycheck than paying the bank back over time. Unless you have private loans with strict repayment requirements, a sound reasoning is to pay back uncle sam with time. You have little to gain by paying it back asap (10 year repayment).

Right... $100,000 loan at 3% paid in 10 years vs. 30 years differ in interest by $34,000....if you like wasting money.

Also, money earned in stock market has capital gains tax which is about to increase in 2 years... also, stock market can go the other way too.

 

[willrocks]

As I had said, my sole point was to recommend to the OP that a sound financial plan cannot be gained from a message board, and tried to provide an alternate perspective to demonstrate that other options are available.

Thank you for taking the time to attempt to decimate my help.

 

[willrocks]

Right... $100,000 loan at 3% paid in 10 years vs. 30 years differ in interest by $34,000....if you like wasting money.

Also, money earned in stock market has capital gains tax which is about to increase in 2 years... also, stock market can go the other way too.

And you are completely missing the opportunity cost that could come from investing that money. I am merely saying there are other options. If you cannot recognize this...then I don't have any more words for you.

 

[willrocks]

Until your investments tank and you have no cash and no way to pay back your loans. At least if you are debt free you have less to lose should your investments not pan out.

Managing wealth requires more long term thinking than the recent recession.

 

[p-rog]

Fire your CPA.

gah, kinda hard when he's also my brother

 

[willrocks]

Your school likely has ties with financial planners that can help. Ask your administration for a referral. And, please, don't take any advice from an anonymous source. (studentdoctor.net)

 

[owlegrad]

Managing wealth requires more long term thinking than the recent recession.

You seem like a nice person who just wants to help the OP. But different people have different thresholds for risk. I would not feel comfortable putting excessive amounts of money into stocks rather than using that same money to pay off my loans and I certainly wouldn't advise others to manage their money that way. Once I am debt free...well I still have a pretty low tolerance to risk.

 

[owlegrad]

Your school likely has ties with financial planners that can help. Ask your administration for a referral. And, please, don't take any advice from an anonymous source. (studentdoctor.net)

Well, except yours. 😉😛

 

[owlegrad]

gah, kinda hard when he's also my brother

That should make it easier!

 

[PharmDstudent]

Wow! I'm impressed. I thought this thread was an open and shut case, but you all have delightfully entertained me with your financial wisdom (2 thumbs up!) ... except All4MD, because if it was all teddy bears and rainbows, then there would be no such thing as a mega doom and gloom thread : )-

 

[All4MyDaughter]

Wow! I'm impressed. I thought this thread was an open and shut case, but you all have delightfully entertained me with your financial wisdom (2 thumbs up!) ... except All4MD, because if it was all teddy bears and rainbows, then there would be no such thing as a mega doom and gloom thread : )-

You again? Dropping a little cocca into this thread too, eh? 😉😀 I'm going to make a thread titled the Official Cocca Megathread and merge all your posts into it!

 

[homeslice]

Better yet, buy $15,000 worth of OPTR and come May when fidaxomicin gets the FDA approval, it'll probably be $30,000+.... pay some tax on it and pay off more loans!

Gah! If only I had money, I'd be all over this. Told my dad to do it though.

 

[PharmDstudent]

You again? Dropping a little cocca into this thread too, eh? 😉😀 I'm going to make a thread titled the Official Cocca Megathread and merge all your posts into it!

I think I'll change my avatar to a picture of Jesus in a cloud holding a book and saying: "Take the job".
I mean. I'm genuinely concerned. The numbers are not adding up... fatal error. In 2 years, there will be 500 more graduates in this state. Where the eff... are they going to go? I don't think the magical economy fairy can even solve this one!

 

[owlegrad]

I think I'll change my avatar to a picture of Jesus in a cloud holding a book and saying: "Take the job".
I mean. I'm genuinely concerned. The numbers are not adding up... In 2 years, there will be 500 more graduates in this state. Where the eff... are they going to go? I don't think the magical economy fairy can

DUE IT! Pure Awesomeness!

 

[All4MyDaughter]

I think I'll change my avatar to a picture of Jesus in a cloud holding a book and saying: "Take the job".
I mean. I'm genuinely concerned. The numbers are not adding up... fatal error. In 2 years, there will be 500 more graduates in this state. Where the eff... are they going to go? I don't think the magical economy fairy can even solve this one!

DUE IT! Pure Awesomeness!

I agree. That avatar would be full of win.

And for the record, when I talk about the Negative Nellies who drop the same Gloom and Doom into every thread, I don't think of you. I'm referring to the folks who want to turn every thread on the forum into a lament about oversupply. 🙂

 

[PharmDstudent]

I agree. That avatar would be full of win.

And for the record, when I talk about the Negative Nellies who drop the same Gloom and Doom into every thread, I don't think of you. I'm referring to the folks who want to turn every thread on the forum into a lament about oversupply. 🙂

Ok. I feel guilty nevertheless.

 

[avatarftw]

👍 Great advice. Also, as per current rules, 2,500 of loan interest is tax deductible for certain incomes. I believe you get this tax deduction for below 120,000 of income or so but I'm not current with the rules right now.

However, that 10% return that the stock market yields over its history will be pre-tax. You have to calculate what the long-term capital gains rate is right now. The post-tax yield is what you have to compare with the interest rate on your loan.

If the post-tax yield in your investment is greater than 8.5% (grad plus loan), then its worth it. However, that money that you invest should be money that you CAN afford to lose. You also need about 6 months of emergency funds in case something happens in your life; you can put the emergency fund in a high yield internet savings account that is very liquid. No sense putting it in a CD that has the same yield as the online account but ties up your money.

I would not ask for advice on repaying loans on this message board. Many people adopt the common fallacy that repaying loans promptly is the best way to go (not the case). Seek a financial advisor who can uniquely advise you. You can afford it, and long term, it is worth it.

Example:

Every dollar you pay back in loans is one dollar less to invest. The average return on the stock market over the past twenty odd years is ~10%. In that sense, you are essentially breaking if you choose to wait to pay back your loans.

Further, if you repay the loans instead of properly investing it, you won't have any liquid cash should an emergency or business opportunity (i.e. an independent selling out) come up.

Or, look at it this way: paying back your loans promptly will have you living closer to paycheck-to-paycheck than paying the bank back over time. Unless you have private loans with strict repayment requirements, a sound reasoning is to pay back uncle sam with time. You have little to gain by paying it back asap (10 year repayment).


And please, seek a financial advisor. A couple hundred dollars for quality advice is a pittance compared to your paycheck and mass of debt, and trumps the advice you will find for free anywhere else. My thoughts above only served to possibly open you to the notion that other perspectives exist.