Forbearance on student loans

[iowabergmanns]

My wife and I are considering placing each of our student loans (currently 7.77%) for a period of approximately 6 months and applying those payments to pay off our last credit card (currently 7.99%). Forbearance is where we can temporarily suspend payments. If the capitalized interest is not paid at the end of the 6 months (approx $1,400) it's tacked on to the principal balance. Has anyone done this or is this a good idea?

[cooliemae]

From the 6-month $1400 interest rate, I would say that you should just continue to pay the student loans off. My wife put her student loan in forbearance temporarily last year and at the end of the forbearance we didn't have the funds to pay the interest, so the money was applied to the principle. Now we have more money to pay off than we would have if we had just continued to pay.

How much do you owe in student loans...how much in cc debt? Those numbers will help with the advice giving.

[disneysteve]

I think the difference between 7.77% and 7.99% is insignificant. I would just keep paying on both.

[iowabergmanns]

Originally Posted by cooliemae

From the 6-month $1400 interest rate, I would say that you should just continue to pay the student loans off. My wife put her student loan in forbearance temporarily last year and at the end of the forbearance we didn't have the funds to pay the interest, so the money was applied to the principle. Now we have more money to pay off than we would have if we had just continued to pay.

How much do you owe in student loans...how much in cc debt? Those numbers will help with the advice giving.

We have about $28,000 in student loans and $5,000 in cc debt. We plan on having the money to pay the interest at the end of the forbearance.

[jIM_Ohio]

pay both cc and students loans off at current pace. I realize the balance of the cc is smaller, but look at interest rates and repayment periods of each. 7.77% to 7.99% is not enough to convince me there is any benefit to changing present course. When will the cc be paid in full on current schedule? When will student loan?

What is monthly budget and how do these payments (in size) compare with other portions of budget?

[noppenbd]

I am going to go against the grain and say if you can do the forbearance and pay the accumulated interest you should do it. I think if you can get on an aggressive plan to pay off the credit card before the forbearance ends it may force you to take a hard look at your budget. I don't see the harm in forbearing since you would have to pay that interest either way.

[disneysteve]

Originally Posted by noppenbd

I don't see the harm in forbearing since you would have to pay that interest either way.

By doing a 6-month forbearance, you pay just interest for 6 months and no principal, so you extend your repayment period by 6 months and pay an extra 6 months worth of interest.

[jIM_Ohio]

Without seeing whole budget, this appears to be someone doing one of 2-3 things

1) being penny wise and dollar foolish.
2) a dave ramsey die hard which is making a bad decision for a psychological benefit
3) there is a bigger budget or spending issue we do not see

[noppenbd]

Originally Posted by disneysteve

By doing a 6-month forbearance, you pay just interest for 6 months and no principal, so you extend your repayment period by 6 months and pay an extra 6 months worth of interest.

Yes, but the alternative is dragging out the credit card repayment period and paying more to the CC company, which is not tax-deductible and is at a higher interest rate.

My point is that you are more likely to get those debts paid down if you give yourself some incentive, which the forbearance would definitely do.

[disneysteve]

Originally Posted by noppenbd

My point is that you are more likely to get those debts paid down if you give yourself some incentive, which the forbearance would definitely do.

That would speak to Jim's 2nd point above. If OP needs the psychological boost that will come from repaying the CC sooner, this plan might be the way to go. But from a strictly dollars and cents standpoint, it probably will cost them more money in the end. I can't run the numbers since we don't have the specifics (loan term, monthly payment, etc.) but I'm pretty sure the forbearance will cost them more than it saves them.

[noppenbd]

Originally Posted by jIM_Ohio

Without seeing whole budget, this appears to be someone doing one of 2-3 things

1) being penny wise and dollar foolish.
2) a dave ramsey die hard which is making a bad decision for a psychological benefit
3) there is a bigger budget or spending issue we do not see

Jim, I have to take issue with you pooh-poohing psychological benefits. If you look a lot of behavior when it comes to finance, you will see that people do not behave like the logical creatures you want them to. Yes, in a perfectly logical world, Dave Ramsey's ideas are foolish.

However, people are not perfectly logical, or even close in many cases!

If people were perfectly logical, we would not run up credit card debt at all!
If people were perfectly logical, we would all be saving 15% of our paychecks for retirement from day 1.

Sometimes I think DR's "behavioral finance" can be very helpful, especially when we are talking about very short time frames. In this case, forbearing for 6 mos would start a ticking clock which would force OP to pay CC down quickly. How is that a bad decision?

[jIM_Ohio]

Originally Posted by noppenbd

Jim, I have to take issue with you pooh-poohing psychological benefits. If you look a lot of behavior when it comes to finance, you will see that people do not behave like the logical creatures you want them to. Yes, in a perfectly logical world, Dave Ramsey's ideas are foolish.

However, people are not perfectly logical, or even close in many cases!

If people were perfectly logical, we would not run up credit card debt at all!
If people were perfectly logical, we would all be saving 15% of our paychecks for retirement from day 1.

Sometimes I think DR's "behavioral finance" can be very helpful, especially when we are talking about very short time frames. In this case, forbearing for 6 mos would start a ticking clock which would force OP to pay CC down quickly. How is that a bad decision?

Slow down- the poster could get a psychological benefit from paying off the loans over time too. The issue is the need for immediate personal satisfaction.

Maybe it makes sense, but again DR followers are like a cult or a religious faction. Suggesting to blindly follow the advice without considering the other side is foolish at best.

I once thought I made a mistake, but I was wrong. So perfection is possible

It's not about the problems which caused the current problems. It is about a narrow solution the OP asked about and I provided possible insights to OP's mindset. Without more input from the OP, don't hate me because I speak the facts and speak the truth.

[noppenbd]

Originally Posted by jIM_Ohio

Maybe it makes sense, but again DR followers are like a cult or a religious faction. Suggesting to blindly follow the advice without considering the other side is foolish at best.

On DR, I agree that blindly following all of his advice is not helpful to many. However, I believe that there is definitely a subset of people out there who need more motivation than just numbers and percentages.

For me, credit card debt is just anathema. So maybe I read a bit more into OP's post than the specific question. When I see someone carrying balances on their cards that tells me that they are not necessarily running the tightest financial ship. So they might benefit from a little rigor, which DR's plan definitely instills. A little short term pain can lead to a much healthier financial outlook in the long term.

In fact, I'm not entirely sure that forbearing is the best way to do this; if the OP wants to get on a tight budget and just pay the minimums on the loan for 9 months, and pays the credit card off in that period, then that would be even better. It depends on whether OP can (or will) be able to do that.