Paying off larger loans or smaller ones first?

Discussion in 'Financial Aid' started by luvely, 09.24.14.

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  1. luvely

    luvely 5+ Year Member

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    This may be a silly question, but I am hoping to pay off around $200,000 in loans when I graduate and they are comprised of larger ones, around $40,000 at 6.8% and smaller ones, let's say $3,000-8,500 at 6.8% or lower interest rate.

    I'm still in school so obviously I'm not sure yet how much I'd be making and when I'd be able to get my first job, but I definitely would like to pay off as much as I can in the first 2-3 years by living at home and working full time.

    I'm not sure how this part works, but I'd want to pay as much as I can above the minimum payment as possible, although I'm not sure if it's better to stretch that out to 10-15 years while paying above minimum like I mentioned or set it specially for a smaller number of years and do it that way?

    And also does it make sense to pay extra each month towards the larger amounts first, or pay off the smaller loan amounts first?

    Thanks! I probably will need to get a financial advisor when I graduate :x but thought I'd ask for any advice here first. Thanks so much!
     
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  3. DrMidlife

    DrMidlife has an opinion 10+ Year Member

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    If saving money on interest is most important, then you pay off the ones that have the highest interest rate first. It doesn't matter what the loan amount is. This isn't fancy financial math, it's just math.

    If you will be more encouraged by success soon than by the intellectual understanding that you're making optimal progress, then pay off a small loan first. There's nothing wrong with doing this if accumulating a bit more interest on a higher rate loan isn't going to cost you sleep.

    Best of luck to you.
     
  4. luvely

    luvely 5+ Year Member

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    You're right, that makes sense :) I just wanted to double check, I guess I have to see which feels better to me-- I'll probably pay off the larger loans first because it makes more sense numbers-wise. Thanks so much!~
     
  5. luvely

    luvely 5+ Year Member

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    I'll just highlight a question I mentioned earlier in my initial post:

    I'm not sure how this part works, but I'd want to pay as much as I can above the minimum payment as possible, although I'm not sure if it's better to stretch that out to 10-15 years while paying above minimum like I mentioned or set it specially for a smaller number of years and do it that way?

    Just wondering if anyone had any insight to this? Whether it's more beneficial to stretch out loan payments over a longer period of time with lower minimum payments and pay off as much above that as possible, or do the same for but for a shorter period of time with larger minimum amounts?

    Wasn't sure if this made any difference money-wise at all? Thanks again so much for any input-- again I'm a bit challenged money/math wise >.< I wanted to call my loan provider but am planning to take their input with a grain of salt.
     
  6. DrMidlife

    DrMidlife has an opinion 10+ Year Member

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    Of COURSE it matters if you stretch out payments. As long as you're paying, you're accumulating interest...which means you're paying more for the money you borrowed than if you paid it off faster.

    This is how credit card companies make money - they offer a minimum payment instead of encouraging you to pay off your card.

    They used to teach the basics of amortization and compound interest in high school math. It's a shame if that doesn't happen now.
     
  7. luvely

    luvely 5+ Year Member

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    I'm not sure you quite got my question-- of course I understand taking longer to pay off my loans will accumulate more interest. That's why I did mention earlier that I wanted to pay off as much of it as I can the first 2-3 years.

    Whether set for 5 or 10 years, I was still planning on paying off as much as possible every month, the whole point at least for me is to pay off as much as I can as soon as I can (above and beyond the set minimum).

    Since I haven't had prior experience with paying loans I was just wondering if anyone had any input on this, if it necessarily matters if you set your total repayment to 5 or 10 years for example if you are still planning to pay the same amount every month anyhow (aka as much as possible)

    If you feel this is a silly question, you don't need to respond-- there's no reason to be rude. Thanks.
     
  8. RangerBob

    RangerBob Not a real ranger... 2+ Year Member

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    Your interest rate doesn't change based on your repayment period. The only factor that could come into play is if you qualify for IBR, then you'd save money by using IBR and paying above the maximum, since the loans you aren't paying down will accumulate interest, but it wont capitalize. Which probably won't save you a whole lot if you're looking at paying things off in 5 years, but it's something (but if your salary is high enough and or your loan balance is/becomes low enough, you won't qualify for IBR). And if all your loans are at 6.8% then there's no benefit for you (the main advantages would be being able to selectively pay off higher interest loans while the others just gather interest that doesn't capitalize, as well as loan forgiveness)

    This means it doesn't matter what your repayment period is--you will accumulate the same amount of interest each month. Since you're making payments on a 5-10 year plan, you'll cover the interest no matter what, and then all the extra goes towards the principle. The faster you can pay down that principle, the better.

    Now, if you consolidate you debt with one of the banks the White Coat Investor mentions, then it DOES make a difference--you will be assigned a fixed or variable interest rate based on your debt, income, and your repayment plan/term. But you do lose a lot of the flexibility with federal loans. However, it may be worth looking into--there are a few posts on the WhiteCoatInvestor website about it.
     
  9. luvely

    luvely 5+ Year Member

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    Thanks so much for your input and advice. I haven't heard of that website before--I will definitely look into it as well as the income based rate which I've heard about before. I'll just call my loan servicers to see get more details on my loan options as well since I do have to get in contact with them anyhow since graduation will soon be approaching.. eek! Thanks again, much appreciated :)
     
  10. RangerBob

    RangerBob Not a real ranger... 2+ Year Member

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    You're welcome. But keep in mind in your case IBR won't save you any money--your loans are all at the same interest rate so you can't selectively pay off the higher rates, and you're proposing paying on a 5-10 year payment plan, meaning you'll cover the accumulated interest each month. Thus the capitalization benefit of IBR won't help you. (But that's actually good--it means you have enough to pay off your loans quickly, which we should all aspire to).

    The only benefit I can think of in your case to do IBR is that you have the flexibility to pay much much less. Though your IBR payment may equal your 10-year payment--your lender goes with whichever is lower.

    The Whitecoatinvestor has been a really helpful website. If you do chose to consolidate your federal loans into a private consolidation loan with one of the many banks he mentions, just make sure you're aware of all the risks. There are a lot of benefits if you plan to pay those loans off quickly, but just make sure you read his entire post (as well as the comments).

    Best of luck, and congratulations on being in the position to pay off your loans quickly (and being willing to do so)!
     

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