Consolidation: 10 year vs. 30 year loan

[fuegofrio17]

What are the pro's and con's of 10yr vs. 30yr loan consolidation? I know you have much lower monthly payments with the 30yr. loan. My main question is if, hypothetically, you pay off your 30 yr loan in 3 years after residency, are you still bound by the terms of the loan to repay 30 yrs. worth of interest? Or can you just pay the loan off early, paying only the balance and interest that has accumulated to that point?

If the latter is possible, why would anyone not want to consolidate for 30 years? Are there any negatives to the 30 year loan (especially if you plan on paying off your balance as quickly as possible)?

thanks for any input.

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[EvilNewbie]

What are the pro's and con's of 10yr vs. 30yr loan consolidation? I know you have much lower monthly payments with the 30yr. loan. My main question is if, hypothetically, you pay off your 30 yr loan in 3 years after residency, are you still bound by the terms of the loan to repay 30 yrs. worth of interest? Or can you just pay the loan off early, paying only the balance and interest that has accumulated to that point?

If the latter is possible, why would anyone not want to consolidate for 30 years? Are there any negatives to the 30 year loan (especially if you plan on paying off your balance as quickly as possible)?

thanks for any input.

The 30 year loan you pay less each month but your overall balance is higher than the 10 year loan (and since the interest rates are so low you can actually "make" more money in investments on a 30 year loan versus a 10 year loan from the money you save from a 30 year loan. If you prepay, then you pay all the interest of a 30 year loan regardless of how much time is leftover (it's probably more beneficial to pay the amount over the 30 years in terms of taxes). 30 year loans you pay more interest and difference of paying $700 versus $300 is considerable each month. You could pay the 10 year and pay less if you want (a 70k loan with a 30 year payoff interest of about 30k higher than a 10 year payoff). 30 year loans you get more of a breathing room to payoff other debts, start up investments, marriage plans, retirement plans, buying a house, etc. during residency or even go party!! It's up to you is 30k really too much for an extra 20 years of low monthly payments? If you are really well off then go with the 10 year plan, unfortunately well off is not a term I would use to describe myself...

 

[Fermi]

What are the pro's and con's of 10yr vs. 30yr loan consolidation? I know you have much lower monthly payments with the 30yr. loan. My main question is if, hypothetically, you pay off your 30 yr loan in 3 years after residency, are you still bound by the terms of the loan to repay 30 yrs. worth of interest? Or can you just pay the loan off early, paying only the balance and interest that has accumulated to that point?

If the latter is possible, why would anyone not want to consolidate for 30 years? Are there any negatives to the 30 year loan (especially if you plan on paying off your balance as quickly as possible)?

thanks for any input.

There are online calculators that can help you do the math. The one on the federal website showed me that with $100,000 in consolidated loans, at today's interest rates, you would pay $117,961.66 with a 10 year vs. $159,154.64 with a 30 year. That's a difference of $41,192.98, or 41% of the original loan amount!

Now, you said you would like to pay your loans off in 3 yrs, so I'm not sure why any of this matters anyway. As long as you make sure your loan company doesn't have a penalty for prepaying or paying ahead on your loans, you would be free to pay off the balance of the loan and be done with it. You will, of course, want to talk this over with a financial aid officer.

 

[Fermi]

If you prepay, then you pay all the interest of a 30 year loan regardless of how much time is leftover (it's probably more beneficial to pay the amount over the 30 years in terms of taxes.

I'm 99.9% sure the first part of your statement is incorrect. You are not responsible for interest that has not yet accrued! If that were true, then there would be absolutely no reason for anyone to make extra payments. At least, I know this is true for fixed rate 30 year mortgages, so I don't see why it wouldn't be the same for fixed rate 30 year student loans.

As for the second part of your statement, if you're talking about the student loan interest deduction in terms of tax benefits, remember that you are ineligible for this deduction if your income is >$65K ($130K if married). So basically, most physicians after residency will have no tax benefits from student loan interest, and will still end up paying the extra $40K in interest on that $100K student loan.

This is not to say that a 30 year consolidation isn't worth looking at. For one, the interest rates are very low now, so you could do better by keeping that debt and investing your extra income to get a greater return (pretty easy to do better than 3.37%). In addition, with inflation that $400 monthly payment may be much less significant in 30 years. The extra interest you're paying may then be absorbed/offset by inflation and return on your investments.

 

[fuegofrio17]

Thanks Fermi! My reasoning is that even though I do plan on paying my loans off quickly, why corner yourself into a high monthly payment? With the 30 year loan, even if you have a bad month or two financially, you have the security of only being required to make a much smaller monthly payment.

Why would anyone choose the 10 year plan over the flexiblility of the 30 year plan? The only reason would be if there are early repayment penalties. From my limited understanding, there are none. Does anyone have any firm information on whether or not early repayment penalties exist for consolidated loans?

(As an aside, I do know mathematically and financially it is more wise to take the full 30 yrs to repay your loans, and then to invest the amount you would have otherwise been paying toward the loan. But for peace of mind and personal comfort I think I will try to pay them off quickly.)

thanks again.