Paying off student loans - need advice!

[Margo]

Hello,
I am currently on IBR. However, I've been thinking about a strategy to pay off my loans, eventually. Of note, I have no other debt. Unfortunately, the way federal student loans are set up, none of the monthly payment goes to the principal balance (unlike a mortgage). Moreover, the accumulated interest is substantial, so making large payments will again do nothing to reduce the principle balance.
I would like to borrow money to pay off that interest, or at least make a significant dent in it. My question is where would I do that (which financial institution or company)? I do realize that I will have 2 loans to take care of, but it's much easier for me to pay off relatively small amounts (like $40,000). Thanks for your help.
I don't see any other way out of the debt hole.

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[RangerBob]

I would never recommend taking out a loan to pay off another loan, unless you were doing so via a consolidation loan or had a lower interest rate. If you're looking at a private loan to pay off that interest, then you'll have a shorter repayment period for the private loan and you'll actually owe more per month. And most private loans, unless they are consolidation loans, come with higher rates than federal student loans.

There are two keys to paying off your loans:
1) Pay as much as possible each month
2) Lower your interest rate as much as possible

If you can't do at least one of those two, nothing you do will help and will only complicate things and get you into a deeper hole.

Or, go for loan forgiveness (like PSLF).

My accumulating interest is substantial. It sucks. My plan? Pay move than the interest I'm accumulating each month. It'll be a lot of money I'll have to fork over to uncle sam, but it's the only way to reduce the principle. If I stay at the non-PSLF-eligible job I signed on to for more than a year or two, then I will likely take out a private consolidation loan (WCI has great posts on these) to lower my interest rate. But my loans would no longer be eligible for PSLF.

 

[The Physician Philosopher]

Why are you doing IBR instead of REPAYE or PAYE? Also, if you aren't working towards PSLF through one of these programs why haven't you refinanced to a lower rate through a private company? More money would go to principal in that situation.

It's hard to know exactly what to advise you to do given the lack of information.

1) are you in or out of training?
2) have you considered PSLF since you are doing IBR?
3) are you living below your means to allow you to hammer away at your debt. Seems like you have done that otherwise since you don't have any other debt.

There are many good websites with solid deals for student loan refinancing (including mine), but I would only encourage you to look at those after you make sure one of the IDR programs and PSLF is not for you.

Like the commenter above, I would not encourage you to take out a second loan.

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[Margo]

Thank you very much for your replies. I am currently paying ~$400 on IBR, which is all I can afford right now. However, this will change in about a year. I am trying to think in advance how to tackle this loan, when I am able to pay much more.

Paying as much as possible each month is a good idea in theory. Unfortunately, in reality, when monthly interest is $1000, and accumulated interest is $50,000, it is depressing to know that even much larger monthly payments (e.g. several thousand dollars) will not even touch a principal balance - according to rules, the entire monthly payment must cover the outstanding interest first. You may ask why so much interest accumulated. Previously, my goal was to pay off other non-educational debt, which was accomplished.

Another suggestion was to lower the interest rate. To do that, I will have to leave income-based repayment program and refinance with a private company, is that right?

I've been thinking about PSLF, and I believe I may qualify. I hope this program is not a myth, however. I have not heard of anyone having their loans forgiven through this program. Have you?

Thanks again.

 

[The Physician Philosopher]

Thank you very much for your replies. I am currently paying ~$400 on IBR, which is all I can afford right now. However, this will change in about a year. I am trying to think in advance how to tackle this loan, when I am able to pay much more.

Paying as much as possible each month is a good idea in theory. Unfortunately, in reality, when monthly interest is $1000, and accumulated interest is $50,000, it is depressing to know that even much larger monthly payments (e.g. several thousand dollars) will not even touch a principal balance - according to rules, the entire monthly payment must cover the outstanding interest first. You may ask why so much interest accumulated. Previously, my goal was to pay off other non-educational debt, which was accomplished.

Another suggestion was to lower the interest rate. To do that, I will have to leave income-based repayment program and refinance with a private company, is that right?

I've been thinking about PSLF, and I believe I may qualify. I hope this program is not a myth, however. I have not heard of anyone having their loans forgiven through this program. Have you?

Thanks again.

Yup. I am on my phone, but Big Law Investor interviewed someone who had their debt forgiven. If not, take the difference you'd be paying towards a private refinance payment and put it in a taxable account. I have an upcoming post on this actually.

I presume based on your statements you are currently in training. Why aren't you doing REPAYE and having half of the interest you don't pay being paid by the government?

TPP

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[Margo]

Thank you for your advice. I appreciate it! There is no good reason why I have not been on REPAYE. I thought it was the same as the IBR, and was not aware that the government would pay part of the interest each month. I just contacted my loan servicer. I was told that I do qualify for REPAYE and will be switching plans this week.

 

[Margo]

Yup. I am on my phone, but Big Law Investor interviewed someone who had their debt forgiven. If not, take the difference you'd be paying towards a private refinance payment and put it in a taxable account. I have an upcoming post on this actually.

I presume based on your statements you are currently in training. Why aren't you doing REPAYE and having half of the interest you don't pay being paid by the government?

TPP

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One more question. To "refinance at a lower rate" with a private company, what interest rate should I be aiming for? My current interest rate on income-based plan is 6.875%. Thank you.

 

[The Physician Philosopher]

One more question. To "refinance at a lower rate" with a private company, what interest rate should I be aiming for? My current interest rate on income-based plan is 6.875%. Thank you.

Depends on a lot of things. Generally, when you are in training you should probably shoot for something around 5 or 6%. However, do the math to make sure you won't get better through REPAYE's interest payment on half of what's left (essentially an interest deduction).

In your last year, you can refinance to an attending rate once you have a contract in hand. Most attending rates I see vary from 3 to 4%, though it can be higher if you choose a longer term.

This is all predicated on not doing PSLF, though. You should consider that first.

Feel free to check out my page on my website for some more information and some of the best cash back rates if you decide to refinance.

TPP

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[Margo]

Just wanted to add that the hardest part (mentally) of switching from IBR to REPAYE was the capitalization of interest. $50,000 after all. Of course, it raised my monthly interest. However, I did the calculations, and the switch was nonetheless beneficial.
Anyway, thank you for all the suggestions! I found them very useful.

 

[mvenus929]

Just wanted to add that the hardest part (mentally) of switching from IBR to REPAYE was the capitalization of interest. $50,000 after all. Of course, it raised my monthly interest. However, I did the calculations, and the switch was nonetheless beneficial.
Anyway, thank you for all the suggestions! I found them very useful.

Yeah, I'm in this situation and still debating it. Almost 8 years of interest on some of my loans... it'll be painful to see.

 

[redfish955]

Pay them off as fast as possible. If you let them linger you will drop 800k in loans.

 

[stillpremed]

Moonlight the hell out of residency and fellowship. The more work you put in the front end, the less you will pay out on the backend.