Student loan consolidation advice

**jIM_Ohio** · 12-31-2008, 10:49 AM

Need more information.

What are the minimum payments on each?
How long will you be repaying all 4 loans (usually 10 years, but check)?
What is your monthly budget and savings plan?

First, make sure 15% of your income is being set aside for retirement. 15% of gross pay into 401k for example, or 5k to a Roth IRA and another 7% to 401k (if that totals 15%).
Second, put 5% towards short term savings. Might be for new house, new car, vacation or something.

This means 20% of your gross pay is set aside for your financial security now and in the future.

On 80% of your gross pay, you need to budget all expenses.
Include the minimum to pay on all student loans
Make sure you add the 15% and 5% numbers above so you are paying yourself first.
Include food, utilities, rent, car and similar expenses.

Does the budget balance? If you have extra would you
a) spend it
b) pay down student loans
c) invest it (increase the 15% or 5%)

My suggestion would be to do the calculations above first. Get the budget to balance so you spend less than you earn.

Then use a portion of the 5% number to pay down the third loan ($12k at 10%). For example if the loan payment is $158.88 round the payment up to $200 even. The extra $40 and change pays off loan in 7 years instead of 10.

Apply that $200 to the fourth loan (6%, $16464, pymt of $182.78) on the 7th year and 1st month (once loan 1 is paid off) and see that the 120 month repayment schedule is shortened to 101 months (paid off almost 2 years early).

Then pay the $382 to the 2nd loan ($16763, 6%, pymt of $186.10) and see it is paid off 8 months after you start the extra payments of $382.

Then pay the $568 extra to the 1st loan ($21732, 5%, payment of $230.50) and see that within 4 months of the extra payment of $568 it is paid off.

You are free of the student loans with this technique 8 months short of 10 year/120 payment timeframe.

Total payment budget:
$21,732 @ 5% $232.50/mo
$16,763 @ 6% $186.10
$12,811 @ 10% $158.88
$16,464 @ 6% $182.78

is really $67770 with monthly payments of $761.

If you consolidate the $67770 it will be for one of two reasons:
1) you cannot afford to pay $761/month
2) you can pay the loans off sooner than 120 months from now (remember if you make $761 payments now, you are free of the student loans in 120 months regardless of repayment strategies).
2a) more than likely this will be done with a lower interest rate (like 4-5%).
2b) be careful of companies increasing length of repayment from 10 years to 20 or 30 to get payment down)
2c) if you get a lower rate, make sure there is no early payment penalty, so even a lower rate with longer term is OK- you just need to maintain the same repayment length of 120 months.

I get all the numbers above with a spreadsheet which calculates repayments. My estimates were 10 year repayment and interest/payments calculated similar to mortgages on houses.

If you got a 6% interest rate for 20 years on the $67770 total, your payment drops to $485.

If you make the same $761 payment as you intended before, you get all loans paid off in 119 months (1 month short of not consolidating and no extra payments at all).

Rounding up to $800 is 111 month repayment plan (saves 9 payments).

If you "round up" payment to $500 your repayment period drops from 240 months to 228 months (save 1 year of payments from 20 year schedule).

For $761 payment to "work in your favor" on consolidation, look for interest rate at or below 4%. 4% on $67770 with $761 payment (some of that is extra principal) pays of 20 yr loan in 106 months (14 months short of original 10 yr plan you have now).

You need to decide what you want to accomplish with consolidation
1) lower monthly payment
2) pay off faster
3) more flexible payment schedule

1) can be done with consolidation easily.
2) can only be done if the consolidation lowers your interest rate considerably
3) can only be done with special loan terms. Be careful if you cannot do the standard payments plans most of the rest of us use. Nothing is free.

My advice is keep loans seperate and pay them off one at a time. If you only paid off the first loan (in my original example) then kept the $200 so you could spend it, that is better than any of the consolidation examples I listed (IMO).

**neobot85** · 12-31-2008, 11:33 AM

Thanks for all the information Jim!

To answer your questions:

What are the minimum payments on each?

$21,732 @ 5% - $178.44
$16,763 @ 6% - $152.94
$12,811 @ 10% - $122.45
$16,464 @ 6% - $140.38

Total: $655

How long will you be repaying all 4 loans (usually 10 years, but check)?

15 years

What is your monthly budget and savings plan?

Roughly (all numbers are per month)...

Income - $3000 a month post-tax ($150 to 401k)

Federal student loans (minimum payment) - $200
Rent - $688 (Utilities are provided for)
Groceries - $100
Cell phone bill - $80
Helping parents - $500
Savings (I try to do...) - $600
Misc spending - $200

That leaves about $632 for private student loans. I can't actually pay off each loan one at a time because when I make a payment, Sallie Mae spreads it across all four loans in a weighted way (more goes towards higher principal loans).

Although I can afford the $655 a month by cutting on savings (and the misc spending is usually less than $200), I would like to have the option to pay less in monthly expenses (via consolidation) so that I have the money for upcoming major one-time costs (i.e. wedding, buying a car, getting a house, etc).

Any additional thoughts based off this extra information? I'm particularly interested in whether it makes sense to consolidate as a way of setting aside extra cash for these one time expenses (i.e. downpayment on a mortgage)

Also, just to clarify, I know I asked on another post about my retirement savings vs high yield accts...this scenario is actually for my fiance, not my own situation.

**jIM_Ohio** · 12-31-2008, 11:58 AM

Originally posted by neobot85 View Post

Thanks for all the information Jim!

To answer your questions:

What are the minimum payments on each?

$21,732 @ 5% - $178.44
$16,763 @ 6% - $152.94
$12,811 @ 10% - $122.45
$16,464 @ 6% - $140.38

Total: $655

How long will you be repaying all 4 loans (usually 10 years, but check)?

15 years

What is your monthly budget and savings plan?

Roughly (all numbers are per month)...

Income - $3000 a month post-tax ($150 to 401k)

Federal student loans (minimum payment) - $200
Rent - $688 (Utilities are provided for)
Groceries - $100
Cell phone bill - $80
Helping parents - $500
Savings (I try to do...) - $600
Misc spending - $200

That leaves about $632 for private student loans. I can't actually pay off each loan one at a time because when I make a payment, Sallie Mae spreads it across all four loans in a weighted way (more goes towards higher principal loans).

Although I can afford the $655 a month by cutting on savings (and the misc spending is usually less than $200), I would like to have the option to pay less in monthly expenses (via consolidation) so that I have the money for upcoming major one-time costs (i.e. wedding, buying a car, getting a house, etc).

Any additional thoughts based off this extra information? I'm particularly interested in whether it makes sense to consolidate as a way of setting aside extra cash for these one time expenses (i.e. downpayment on a mortgage)

Also, just to clarify, I know I asked on another post about my retirement savings vs high yield accts...this scenario is actually for my fiance, not my own situation.

My comments

1) the 5% you have going to your 401k is not nearly enough. You are basically suggested you need to live on 95% of what you make, and the most important attribute to financial success is spending less than you earn. Spending 95% of what you earn is not a good recipe. Look to bump that up to 15%. Because of taxes you will not see take home drop by 10%, it will drop by maybe 7%, probably close to 6% (considering 25% fed taxes, state taxes and similar).

The missing money can drop the savings.

Why invest only $150/mo for retirement and add 600/mo to savings. IMO those numbers should be reversed.
$450 (15% to 401k) and about $350 or $400 to savings (because of taxes you will not lose as much as you think).

I assume the $400 going to savings is for the wedding. Can you suggest what the savings amount (goal) is and when the money is needed?

In addition you can afford the student loans, just shift some of the money out of savings and send them to the student loan.

Here's how you will fix Sallie Mae. Call them and tell them you get paid every week. You need each loan paid 7 days apart.

Have one loan paid on the 5th of the month
Next loan 12th
Next loan 19th
Next loan 26th.

Then once the loans are on seperate statements, pay extra on the loan of choice.

I had a similar issue when I graduated with citibank.

If that does not work write a seperate check every month for each loan (do not autopay them). On the memo part of the check pay extra to the loan of choice.

You can solve the extra payment issue if you choose to put the effort in.

Don't worry about gaining flexibility. What you want to do is pay off one loan quickly and you will gain the flexibility you desire. See my next post.

**jIM_Ohio** · 12-31-2008, 11:59 AM

Don't worry about gaining flexibility. What you want to do is pay off one loan quickly and you will gain the flexibility you desire. See my next post.

$21,732 @ 5% - $178.44
$16,763 @ 6% - $152.94
$12,811 @ 10% - $122.45
$16,464 @ 6% - $140.38

Total: $655

Pay down the $12811 loan

I have the loan payment calculated to be $137.67, so this will actually get paid off sooner than I list by a month or two (apparently student loan terms are different than mortgage terms as far as interest calculations).

Pay $200/mo ($78 extra). Write an extra $78 check and snail mail it each month or do something clever like that so you control which loan it is applied to.

In less than 8 years you get your entire $200/mo into the budget.
If you want the money sooner just shift more from savings into the student loan repayment. For example:
$250 gets you money back in 5 years.
or
$300 gets you money back in 4.5 years.

I would rethink how you do the budget.
Your 15% number is $450/mo
Your 5% number is $150/mo

You have $750/mo going to this now ($150+$600).
The numbers above are $600/mo and the 15%/$450 is pre-tax, so you will probably have about $150 to play with. Send that $150 (or something close to it) towards the 10% student loan. You will get the $150+$122 back into budget within 5 years, probably closer to 4. Just make sure the money is applied to only the 10% loan. If you do autopay it will be done sallie mae's way. If you send in the check, you can create a cover letter which says "apply to acct # 1234566778 principal" and just print off around 60 of those letters so you can send one in with each extra payment.

Summary of my solution
$450/mo to 401k
$150/mo to savings
$150/mo going to student loan repayment (to free up $122+$150 in budget within 4-5 years).

The wedding expenses are clearly the wildcard here. I assume the $600/mo was going to the wedding... if you can find a way to divert around $150 to student loans you will soon find it is easier to free up liquid cash paying down one of the loans than consolidating all 4.

That's my take.
I graduated with 84k of debt in 1997. I was earning about what you make now (I was making 39k). I did not consolidate. All my loans were off the books within 9 years, and my big ones were off the books in 6-7 years. My interest rates were around 5% on the stafford (variable) and around 10% on private loans (fixed). I rounded up like I suggested (on all the private loans- about 50k of the total) until I had the resources to pay attention to only 1 of them.

**jIM_Ohio** · 12-31-2008, 12:20 PM

My third and final comment will be
1) get thru the wedding planning before saving for house or car. If car breaks down before you get married, solve the problem as cheaply as possible
2) get one loan off the books, that should free up almost $300/mo which makes for good car savings contribution to savings account
3) Does spouse have income, and how does that impact the house savings picture? No reason to discuss one person savings for house with one budget if two people are working.

Gain flexibility with student loan payment with early repayment of one loan (saves you $122mo). I doubt consolidation will save you $122/mo, and it will almost definitely cost you more in interest.

**neobot85** · 12-31-2008, 12:24 PM

Thanks for all the advice Jim. I'm going to give Sallie Mae a call and see what we can do about paying each loan separately. Thanks again!!

**KatieNK** · 01-01-2009, 10:38 AM

I didn't have time to read all the replies, but have you looked into consolidation? Every website I looked at said that the company had suspended their consolidation program right now. I'm not sure why, though.

Student loan consolidation advice