Student Loan Question

[newbiedoc1977]

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I don't know if this is the best forum to post this on, but I know most of us have experience with loans:

My wife and I are starting to pay back our loans. We have her loan and a secured loan with the bank. I hope to pay them off in 3-4 years, given that they are our highest interest debt.

Right now I double the minimums and split the payment for each loan. For example, for one loan the payment is $400, so I pay that then make a seperate payment for another $400 later that month, for $800 total each month. I do this so that our checking account does not take a big hit at one time.

Am I doing this wrong and paying alot of extra interest? Would it be better to pay the whole $800 on one payment at the beginning of the month, or is it ok to split it up?

Thanks

 

[NinerNiner999]

That depends on how frequently your lender compounds/computes your interest. If they do this monthly, you should be fine. If they do this daily, you will be accumulating more interest than you should.

While starting off, it may be a good idea to withold the most amount of tax you can with the IRS. This will reduce your taxable income, may allow you to qualify for an additional student loan interest deduction, and provide you with a large lump sum refund each year, which you can throw into your loans to pay them faster. 15 to 20k of refunded taxes annually is not unheard of. This combined with your $800 monthly is close to $30k in principal reduction.

What is the rate on your loans? If it is consolidated at 5% or less, I'd think about paying the minimum and investing 25k per year, where you will get a return of 10% without much trouble. On the other hand, if your rate is higher than 5-6%, I'd pay it down like you are...

 

[dpmd]

Extra withholding is like lending the government money and not asking them to pay interest. I would only recommend it for people who don't have the discipline to save enough to cover a tax bill if they fall short. Adjusting your witholding won't reduce the wage that is reported on your W-2 and therefore won't reduce your adjustable gross income (which is what your taxable income is based on). It also won't change whether your income qualifies you for the student loan interest deduction.

Whether to pay down debt or invest the money is a decision you should base on your rate of return on investments, the risk you are willing to take, and keep in mind that inflation and taxes will affect how much money you will actually make on money you invest. Also factor in whether your loans are fixed or variable.

One other thing. Check if your lender is applying your extra payments to the principal of the loan or treating them as prepayment. If they are doing the latter, you will end up paying more interest than if they are applying it to the principal. Just because you write it on the check doesn't mean they will do it (as I have found out from both the direct loan servicing center, and nelnet). You can make them make the changes retroactively if you find out they haven't been doing it.