STUDENT LOANS paying off multiple loans at varying interest rates

[pharmacy7424]

Situation:

16 different federal stafford loans, all at different principal balances and at different interest rates. Have never consolidated. This came from being in school for 8 years, taking out a new loan each semester, and how the fed has changed rates slightly over the years. Total 128k at a weighted average of 5.7% (5.5% after the 0.25% discount for automatic debit).

Question:

I intend to pay more than the minimum to get the loan payed faster. How do I know which loan to apply any additional payments towards? It would make sense to apply extra funds towards the loans with higher interest rates, but at what point does the balance on the higher interest loans get low enough to tackle the next loan?

Also, how do I compare the interest savings from paying off my loans faster to what I would make if I put the extra towards a 401k instead?

Is there a computer software that I can plug all my loans into and it will give me a fastest repayment strategy?

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[FarmD711]

You should always pay the higher interest loan first. Even if the balance is lower than a lower interest loan.

 

[pharmacy7424]

Another thought:

My repayment at the standard 10-year is 1400/mo.

My repayment at the extended graduated plan is just 600/mo.

Would it make sense to go on the extended graduated plan, and put the $800 difference directly towards my highest interest loans?

I would not be trying to stretch my loan over a longer period of time (goal again is to pay them off quickly), but maybe this would give me additional monthly money to put towards the highest interest loans?

 

[pharmacy7424]

You should always pay the higher interest loan first. Even if the balance is lower than a lower interest loan.

OK, so lets say the balance of loan (1) is 1,000 at 6.8%. The balance of loan (2) is 10,000 at 5%. Would it still be better to pay off loan (1) before starting loan (2)?

 

[FarmD711]

OK, so lets say the balance of loan (1) is 1,000 at 6.8%. The balance of loan (2) is 10,000 at 5%. Would it still be better to pay off loan (1) before starting loan (2)?

Yes, that is what I said.

 

[deleted470613]

There's an app called debt free you can download from the phone. you plug in all your loans and it will calculate how you should pay it, there's 2 methods, the snowball method which is paying the smallest balance first or avalanche method which is paying highest interest regardless on the balance.

 

[rxgolfer]

OK, so lets say the balance of loan (1) is 1,000 at 6.8%. The balance of loan (2) is 10,000 at 5%. Would it still be better to pay off loan (1) before starting loan (2)?

With the "Avalanche method" which is paying off higher interest rate loans first, you pay the minimum amount of each loan. The extra money goes into the highest interest rate loan. However i'm confused about what the minimum is for each loan. Can someone clarify on that part?

 

[PharmerC]

With the "Avalanche method" which is paying off higher interest rate loans first, you pay the minimum amount of each loan. The extra money goes into the highest interest rate loan. However i'm confused about what the minimum is for each loan. Can someone clarify on that part?

The minimum would be the minimum stipulated monthly payment by the loan provider.

You should be making higher payments on whichever loan is costing you more overall interest. Why pay off a $1000 loan at 6.8% faster when a $10,000 loan at 5% is costing you way more in interest which is completely lost money. Simple math will prove this. $68 yearly interest vs $500. Your loan provider should show in each monthly statement how much each loan is costing in interest. Deciding which loan to pay on could change throughout the years depending on which will cost more in montly interest. The snowball and avalanche methods seem like a good way to throw away money.

I'd also recommend asking these types of questions in a finance forum, as I have seen several threads such as these with horribel advice

 

[rxgolfer]

After downloading the DebtFree app, and going through many different scenarios, the avalanche method always came out on top. I have about 13 different loans ranging from a few thousand to $100,000. The debtfree calculates by 4 different methods: Avalanche, snowball, highest amount first and custom. I played around with the custom option quite a bit, moving my highest interest loans first, then if the lots had the same APR, by least amount of owed first etc. etc. Avalanche always came out on top. Anyone else had the same results?

 

[FarmD711]

Avalanche will always come out on top. Paying off the amounts with higher interest rates will always save you the most. I don't understand why this is so hard to comprehend. Think of it as one big loan, but each piece has a different interest rate. You would always want to pay off the piece with the highest interest rate first. Even if the other piece has 10x the balance, you will still save more by paying off the smaller higher balance piece first.

The snowball method only gives you a psychological "good feeling" by decreasing the total number of loans but you end up paying more in interest using it.

 

[FarmD711]

Why pay off a $1000 loan at 6.8% faster when a $10,000 loan at 5% is costing you way more in interest which is completely lost money. Simple math will prove this. $68 yearly interest vs $500.

Because that is how you save the most money. You are thinking about it incorrectly. If you have $1000 to apply to a student loan, you put it to the 6.8% piece every time. If you put it toward the $10,000 loan at the beginning of the year, your total yearly interest for the two loans would be (500-50) + 68 = 518. If you put it toward the $1000 loan, your total yearly interest for the two loans would be 500+ (68-68) = 500.

 

[FarmD711]

I'd also recommend asking these types of questions in a finance forum, as I have seen several threads such as these with horribel advice

Good advice considering the advice you posted...

 

[BMBiology]

Why pay off a $1000 loan at 6.8% faster when a $10,000 loan at 5% is costing you way more in interest which is completely lost money. Simple math will prove this. $68 yearly interest vs $500.

If you have $1000:

(1) pay off the 6.8% loan first = $500 interest.
(2) pay off the 5% loan first = $450 + $68 = $518 interest

$519 > $500

 

[Gombrich12]

It obviously saves you money to pay off the higher interest loans first. You may want to may off lower balance loans if the rates are close just because it frees up some more money for your monthly budget. I remember knocking out my loans and how good it felt to see my monthly payment go down. I kept a spreadsheet which helped motivate me to keep paying them down.

 

[rxgolfer]

It obviously saves you money to pay off the higher interest loans first. You may want to may off lower balance loans if the rates are close just because it frees up some more money for your monthly budget. I remember knocking out my loans and how good it felt to see my monthly payment go down. I kept a spreadsheet which helped motivate me to keep paying them down.

Good idea, do you know where I can find an excel spreadsheet like that online? Or would you mind sharing that spreadsheet with us (that calculates amortilized payments, etc?

EDIT: Found a great excel spreadsheet calculating snowball/avalanche/highest/lowest/custom

http://www.vertex42.com/Calculators/debt-reduction-calculator.html

 

[Misaenator]

Situation:

16 different federal stafford loans, all at different principal balances and at different interest rates. Have never consolidated. This came from being in school for 8 years, taking out a new loan each semester, and how the fed has changed rates slightly over the years. Total 128k at a weighted average of 5.7% (5.5% after the 0.25% discount for automatic debit).

Question:

I intend to pay more than the minimum to get the loan payed faster. How do I know which loan to apply any additional payments towards? It would make sense to apply extra funds towards the loans with higher interest rates, but at what point does the balance on the higher interest loans get low enough to tackle the next loan?

Also, how do I compare the interest savings from paying off my loans faster to what I would make if I put the extra towards a 401k instead?

Is there a computer software that I can plug all my loans into and it will give me a fastest repayment strategy?

Can you talk to the loan officers that handling your loans to figure out the repayments? There're ppl who know how to balance their loan repayments, and they can raise their credit scores from paying as well.

Sent from my HTC One using Tapatalk

 

[owlegrad]

I know someone who uses the snowball method and it work for that person. I wouldn't completely dismiss it out of hand. But if you are looking for the way to save the most in interest, it is the avalanche method. How people with doctorates do not "get" this is beyond me. Of course paying off the high interest loans first will save you more money, that's how interest works.

 

[sakigt]

The disadvantage (Ive read) is that some banks force you to refinance all of your loans into one loan and if the intrest rates are different, they combine them.

Ive chosen to stay tight, use extra money to pay off the highest intrest loans first and ask they get paid off, decrease my monthly loan payment due.

 

[pezdispenser]

Another thought:

My repayment at the standard 10-year is 1400/mo.

My repayment at the extended graduated plan is just 600/mo.

Would it make sense to go on the extended graduated plan, and put the $800 difference directly towards my highest interest loans?

I would not be trying to stretch my loan over a longer period of time (goal again is to pay them off quickly), but maybe this would give me additional monthly money to put towards the highest interest loans?

I have a friend who tried this, and it caused a lot of problems with Nelnet. Whenever she tried to make an extra principal payment on a specific group of loans, Nelnet would advance the due date for that group. (Even when she checked the box on the website to not advance the due date). Then, when the regular monthly payment goes through, it would still be for the full amount, say $600/mo as in your example, but Nelnet would only apply it to the other loan groups that she was not making extra principal payments to. Basically that works against you because a little bit extra is going to the loans that you are not trying to pay off first. She had to contact customer service every time to have them not advance the due date and reapply the regular monthly payment to all of the loan groups proportionally. Anyway, that's just something to be aware of with Nelnet. Your plan does make sense in theory.

 

[SoylentGreen]

Avalanche is better in the long run, but in the long run we're all dead. Snowball could be better if you're planning on doing something like working part time and raising children while their small (a common situation given that the modal new grad is a mid-late 20s woman) because it lowers your monthly payment sooner.

 

[deleted470613]

After downloading the DebtFree app, and going through many different scenarios, the avalanche method always came out on top. I have about 13 different loans ranging from a few thousand to $100,000. The debtfree calculates by 4 different methods: Avalanche, snowball, highest amount first and custom. I played around with the custom option quite a bit, moving my highest interest loans first, then if the lots had the same APR, by least amount of owed first etc. etc. Avalanche always came out on top. Anyone else had the same results?

I'm glad you utilized the app there's a setting to turn on snowball method, how did that come out ? Personally I would use snowball method which is the easiest to manage multiple loans and quickest way to bring down loans the less interest u will pay. If u have small balances like around $1000 or so regardless how high interest is, I'd get rid of the small balances first to minimize multiple loans until u narrow it down to like 3-4 loans then apply avalanche method. .

 

[rxgolfer]

I'm glad you utilized the app there's a setting to turn on snowball method, how did that come out ? Personally I would use snowball method which is the easiest to manage multiple loans and quickest way to bring down loans the less interest u will pay. If u have small balances like around $1000 or so regardless how high interest is, I'd get rid of the small balances first to minimize multiple loans until u narrow it down to like 3-4 loans then apply avalanche method. .

That's a good idea I calculated it out, snowball vs. Avalanche would not make a but if a difference ~2k so ya the psychological aspect might be worth it.