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Which student loans to pay off first?

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    Which student loans to pay off first?

    Hi, I am hoping to find some advice on the most effective way of dealing with my debt. I recently decided to consider buying a home due to the new home buyer tax credit, however almost every mortgage agent I spoke to acted like it was a horrible crime to have student loans. I don't have to have a house right now by any means, but it is something I want to look to in the future.

    Although I had a scholarship to my undergrad school, I still had to take out private loans to get through it. I have been in graduate school twice (I switched programs and had to retake a lot of courses which unfortunately burned a lot of money) and have taken out two public loans to pay for tuition, fees, living expenses etc. I have paid off all of my credit cards except for a Juniper Visa which I recently used to buy a new computer. I worked out my current expenses and I can spare $500 per month on average to put towards reducing my debt since I am working full time while going to school at night.

    I borrowed $12,285 on my private loan, at at it's interest rate of 4.53%, it has accrued to a total owed of $13,507.51. My biggest graduate school loan is through Sallie Mae and it is for $20,500- no interest on this one has accrued since I am still in graduate school. The interest rate on that one is 6.8%. This should cover the rest of my graduate school and I don't intend to take out anymore. My other federal loan is through Wachovia. Luckily, during the gap between my two graduate schools I was able to pay off the interest on this one. It was originally for $8,500 at 6.8% but I have it paid down to $7,607.15.

    My Juniper Visa has a balance of $1200 at 17.54% which doesn't begin to accrue until May 2010. I could pay this completely off right now, but I have heard that it is good to have some revolving debt to show responsibility in making payments on time.

    Since I am actually in a position to shell out $500 per month while in graduate school, I want to take the opportunity to begin paying off my debt. I think that paying as much as I can while they are in deferment can make them less daunting when I graduate. So since interest is not actively accruing, should I tackle the largest loan with the lower interest rate, or the smaller loan with the higher intersest rate. Personally I would like to go the route that would keep the most money in my pocket at the end of it all, but I don't know which option will do that, because of the current deferment situation. Thanks in advance for any help!
    Last edited by akrogers; 06-05-2009, 09:17 AM.

    #2
    If the $1200 does not accrue any interest, I'd recommend taking $100 each month and paying down that balance for 9 months ($900 july'09-mar'10) and then in April payoff the $300 (before May 2010).
    If there is interest charges on this debt, then always PIF (pay in full) each and every month in order to not take on additional debt (in the form of compounding interest charges). PIF also shows in your credit reports, and proves responsibility and no interest in adding to your debt.

    Regarding the student loans...
    Generally it's best to start with the highest interest loan first; and Sallie Mae is in deferrment so leave that alone for now. Concentrate on the other 6.8% loan from Wachovia.

    Currently you have 40k+ of debt mostly in the form of student loans. Your income is 41k, but you have $500 left over each month to either save or throw at debt. Which is not a good debt to income ratio... but student debt is usually viewed more favorably.


    I'm not sure whom you talk with, but I think you need to talk with a true financial advisor, not a real estate agent, nor any type of bank, nor anyone who stands to gain personally by telling you something that just is not in your best interest. Just general people may not know what's in your best interests either. Some of the things you are being told sounds off-the-wall to me.

    Should I save cash or pay off debt before I buy a home?

    Pay Off Debt or Save for a House

    On the other hand, if you have low-rate student loans (below 6%), then you should save for a house instead of pushing to pay them off. Student loans are considered good debt, so lenders look upon them more favorably. In addition, much of the time you can earn a better return on investments. And finally, those loans can be deferred or put into forbearance if times get tough.
    Debt Total: Of course there is an exception to this policy. If you have a large amount of debt, say more than 30% of your income goes to debt repayment of any kind, then you need to start paying down debt.
    Last edited by Seeker; 06-08-2009, 11:01 PM.

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      #3
      Also when your student loan is deferred, it does not accrue any interest.

      Forbearance is a temporary suspension of payments or a reduction of payments ; but it's not as good as deferral because while a student loan is in forbearance, it does continue to accrue interest charges.

      Is your private loan a "student loan" or a "personal loan"?

      If they are student loans, you should be able to defer all of your loans (since you still attend school), and at least put a stop to the accruing of interest.

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        #4
        All of my loans are in deferment status right now thankfully However, a portion of the Sallie Mae loan (5k, I believe) is unsubsidized so it is showing on my account that it is accruing interest. Oh and a paid the credit card debt in full because I was tired of it hanging over my head and I wanted to turn over a new leaf with NO cc debt.
        Last edited by akrogers; 06-09-2009, 11:49 AM.

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          #5
          Ok, since the Sallie Mae loan is showing interest, then I'd concentrate on that one before any others.

          Be absolutely sure with Sallie Mae that when you pay, you have them apply 100% of the payment to that one unsubsidized loan. SallieMae has been known to distribute payments along all the loans on the account; so be careful with that.

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