How To Pay Off This Debt

[rizzmo]

I'm trying to decided what is the best way to tackle our debts. Below are our debts; I listed the student loans in the order we are currently planning on paying them off. Currently we are throwing all our extra money at the student loans which is around $1,200 a month.

$77k student loans with payments deferred until Jan 2011
-$1,768 @ 6.8% Unsub
-$3,555 @ 6.8% Unsub
-$5,849 @ 6.8% Unsub
-$9,109 @ 6.8% Unsub
-$11,255 @ 6.8% Unsub
-$4,266 @ 6.8% Sub
-$6,399 @ 6.8% Sub
-$8,464 @ 6.8% Sub
-$5,500 @ 5.6% Sub
-$5,500 @ 5.6% Sub
-$949 @ 1.8% Unsub
-$5,451 @ 1.8% Unsub
-$8,512 @ 1.8% Sub

$89k Mortgage 6.125% Extra 500/m principal prepayment 8 years 3 months left.

I have been wondering if once the 6.8% loans are paid off it it would make more sense to put our extra money towards the house instead since it is a higher interest rate? Also does the order listed for the loans make sense?

[jIM_Ohio]

-$1,768 @ 6.8% Unsub
-$3,555 @ 6.8% Unsub
-$5,849 @ 6.8% Unsub
-$9,109 @ 6.8% Unsub
-$11,255 @ 6.8% Unsub
-$4,266 @ 6.8% Sub
-$6,399 @ 6.8% Sub
-$8,464 @ 6.8% Sub

Focus on all these loans first, and pay extra on lowest balance first (because all rates are the same) as that frees up more cash flow (sooner).

Have you put the debt payoff on a timeline?

I think it would be better to add the $500/mo from mortgage to the higher student loans until all are wiped clean. If $1200/mo can be applied to principal, some of those loans are wiped off the books in 3 months or less.

-$1,768 @ 6.8% Unsub 1.5 mos
-$3,555 @ 6.8% Unsub 2 mos
-$4,266 @ 6.8% Sub 3.5 mos
-$5,849 @ 6.8% Unsub 4.5 mos
-$6,399 @ 6.8% Sub 5.5 mos

so in 17 months, you knock more than half the loans off the books

[jpg7n16]

Have you graduated?

Something to note: if you've graduated, as soon as the deferral period is over, there is no difference between the subsidized and unsubsidized loans. So you should reorganize your list at that time.

Subsidized Stafford Loan < Information | StaffordLoan.com

And I agree with Jim about stopping the $500 extra on the home, and putting it towards the student loans instead.

During the deferral period, I like your list as is. After the deferral period, you should relist it as:

6.8% student loans (low to high balance)
6.125% Mortgage
5.6% student loans (low to high)
1.8% student loans (take as long as you possibly can to pay these off, and vamp up investing before you ever pay extra on them)


Actually, once the 6.8% loans are gone, I personally start vamping up the retirement savings before paying extra on the home. And I take any employer match before paying extra on the 6.8%.

[wincrasher]

Can this person save by using the 1 time loan consolidation?

Don't forget the tax benefit in you calculation - your mortgage is more like 4% money with the tax benefit.

Also, I'd prioritize retirement first, then unsecured debt, then lastly secured debt.

[littleroc02us]

Personally I would recommend a more motivating method of paying off debt. Arrange your debts from smallest to largest, don't worry about interest rates. Stop paying your mortgage for the moment. According to my math you can put $1700 towards the smallest. That immediately knocks off the 900 dollar one and knocks off 1/2 of the 1700. If you keep doing it your way, your trying to put out to many fires at once. That takes longer and doesn't give you any sense of accomplishment. Plus you will have more money freed up right away, because you are eliminating minimum payments each time you conquer another debt.

[sm808]

Originally Posted by littleroc02us

Personally I would recommend a more motivating method of paying off debt. Arrange your debts from smallest to largest, don't worry about interest rates. Stop paying your mortgage for the moment. According to my math you can put $1700 towards the smallest. That immediately knocks off the 900 dollar one and knocks off 1/2 of the 1700. If you keep doing it your way, your trying to put out to many fires at once. That takes longer and doesn't give you any sense of accomplishment. Plus you will have more money freed up right away, because you are eliminating minimum payments each time you conquer another debt.

Not that I agree with this, but if you do go down this road, you do still need to pay your mortgage and make minimum payments across the board on all your Student Loans. Did this post mean to stop paying extra on other things? If so, it might work for some people.

[rizzmo]

My wife has graduated. The loan deferral period ends Jan 1st 2011. I already am maxing out my 401k each year. I suppose we could also contribute to Roth IRA’s, something to think about. Each loan that is paid off reduces our monthly payment towards loans freeing up more cash; I think consolidation would be counterproductive. Paying off higher interest loans first makes more sense to me, even if it is a less encouraging method.

I have some additional good news since my last post. October at the latest, quite possibly sooner, my annual gross will be increasing to $160k (currently I earn $115-$125k) this will mean quite a few more dollars towards loan repayment. Unfortunately, this also means we will loose the tax benefit on the interest, but the additional income should more than make up for this.

[jIM_Ohio]

Originally Posted by rizzmo

My wife has graduated. The loan deferral period ends Jan 1st 2011. I already am maxing out my 401k each year. I suppose we could also contribute to Roth IRA’s, something to think about. Each loan that is paid off reduces our monthly payment towards loans freeing up more cash; I think consolidation would be counterproductive. Paying off higher interest loans first makes more sense to me, even if it is a less encouraging method.

I have some additional good news since my last post. October at the latest, quite possibly sooner, my annual gross will be increasing to $160k (currently I earn $115-$125k) this will mean quite a few more dollars towards loan repayment. Unfortunately, this also means we will loose the tax benefit on the interest, but the additional income should more than make up for this.

Its been 15 years since I graduated college more or less. When consolidation offers came my way, most took my current 10 year repayment period and bumped it up to 30 years, and also gave me a lower rate.

For example if I had loans which were

33k stafford interest rate of 5% payment of $325/mo
private loan 1 $14k interest rate of 10% payment of $200/mo
private loan 2 $14k @10% payment of $200/mo
private loan 3 $8k @9% payment of $100/mo
(all are approximate guesses- the $825/mo was a real number though)
all had 10 year repayment terms

the consolidation offers were to extend period out to 30 years and give me a rate of about 6% and drop payments considerably. However I found it easier to snowball payments and free up cashflow than to consolidate.

2 reasons
1) If I consolidate cash flow is not really freed up until all debt is gone (69k in my case)
2) When I freed up cash flow, not all went to debt repayment (some went to spending and eventually to purchase of condo).

So if you consolidate, look to do the following

1) keep payment the same as it is now
2) keep repayment period same as it is now
3) (result)=you pay off loans faster and spend less money on them if you did not consolidate