What's my debt strategy?

[thrain]

In May I will be graduating from a top MBA program with approximately $169,000 in federal loans (sub, unsub, PLUS) at a weighted average interest rate of 7.45%. All of our federal debt is from funding my MBA.

Wife and I will make a combined $200k/salary + 50k/bonus next year. We are both employed by large corporations. We are ready to start a family and would love to purchase a home rather than continuing to rent. However, with such a large principal and interest already accruing at such a high rate, it seems to me that the best course of action is to pay down as much of the balance as possible for the next 3-4 years before considering putting any money down for a house.

It seems illogical to me that I will be paying a 7.45% interest rate on a loan when the risk-free rate is around 2%. This seems even crazier to me when I consider that the graduate school I am attending has a student loan default rate of 1% and a median 1st year graduate income over $100,000.

Is there anything I can do to lower the interest rate?
If not, is my strategy of paying down the balance as quickly as possible the best strategy?

All help is greatly appreciated.

-T

[bigdaddybus]

Do you have a budget? What are you and your wife accustomed to spending each yr?

Based on what you stated and my assumptions I would create a zero based budget for your family living off of roughly 50% of your income and putting the other 50% towards debt repayment/house downpayment.
If my wife and I were in this situation, I could see us agreeing to live on 50% of our income but disagreeing on how to use the remaining 50%. She would want a house ASAP, and I would want the debt gone ASAP. So a compromise of 25% towards each would likely work for us.

[Bob B.]

Just some food for thought ...

A monthly payment of $2,900 gets the loans paid off in about six years, with 41K spent on interest.

A monthly payment of $3,380 gets the loans paid off in about five years, with 34K spent on interest.

Based on your salaries, and depending on how frugally you can live, it seems as if you could pull off a five or six year student debt payoff, while saving for a house down payment.

Hope this helps.

[greenskeeper]

Bob is right. How much short-term "pain" do you want to have in order to get rid of your debt quicker?

[thrain]

Thank you for the responses! From the budget I have put together, I can commit $4000/mo towards student loan debt and/or house payment. I'd like to say we can $5000 but I have yet to convince my fiance that we should be saving that much (we're getting married May 31).

When I start work, I'm going to put all of my signing bonus towards student loans to get the principal knocked down as much as I can up front.

Now, I have to ask this one more time...

Is there some way that I can get a lower interest rate? As an investor, I would love to own the student loans debt of borrowers that were unlikely to default. I could determine the likelyhood of default based on his/her credit history, university student loan default rate, and income level. If you pooled a few hundred MBA student debt loans from top 25 programs, I bet you could attract lots of investors, even at a yield as low as 4%.

So, can't I make that case to someone? Isn't there some lending institution that sees the benefit in this?

I just want to make sure their isn't some angle/avenue that I am missing....


Thanks

[scottgriffin]

Stop Buying and Stop Spending

The best strategy that anyone can have if they are in debt is "STOP SPENDING MONEY" and "STOP BUYING THINGS YOU CAN'T AFFORD" people think they can just buy whatever they want and put it on their credit card. You can do that but you will be in debt for a while!

[boefixepa]

Sounds like a good business, use that MBA and set it up!

[Bob B.]

Is there some way that I can get a lower interest rate?
Thanks

My best advice to getting a guaranteed low cost lower interest rate is to pay off your highest interest rate debt first. Send all of your signing bonus money to your highest interest rate debt. After that, send all of your extra payments to your highest interest rate debt. Make minimum payments on all your other debts. Once your highest rate debt is paid off, attack your next highest rate debt. That's it.

I know that's a more elementary response than what you were looking for. Truth is, I don't know of any investors who assume student debt.

Like someone else mentioned, sounds like a good business opportunity for a recent MBA graduate.

[mgkimsal]

Thank you for the responses! From the budget I have put together, I can commit $4000/mo towards student loan debt and/or house payment. I'd like to say we can $5000 but I have yet to convince my fiance that we should be saving that much (we're getting married May 31).

I'm a bit confused by this. Does she know how much debt is outstanding? $169k is a lot. If you don't save/pay it off now, it doesn't magically get smaller. It magically gets bigger. *now* is the time to be paying it off aggressively. Depending on where you live, you could have this paid off in probably 3 years at your current salaries - $7500/month would have this gone in a bit over 2 years. I know that sounds like a lot, but you've got $200k coming in per year. I've known people with $100k student debts making $40k - you're in a really good position to clean this up and move on with your life in very little time.

[thrain]

My best advice to getting a guaranteed low cost lower interest rate is to pay off your highest interest rate debt first. Send all of your signing bonus money to your highest interest rate debt. After that, send all of your extra payments to your highest interest rate debt. Make minimum payments on all your other debts. Once your highest rate debt is paid off, attack your next highest rate debt. That's it.

I know that's a more elementary response than what you were looking for. Truth is, I don't know of any investors who assume student debt.

Like someone else mentioned, sounds like a good business opportunity for a recent MBA graduate.

Bob -- appreciate the straight forward advice. This clearly is the most logical solution.

mgkimsal -- I am still in school. I start work on July 1. Future wife is fully aware of everything as wel have been living together for the last five years.

[snafu]

Another voice saying $ 169,000. SL averaging 7.5% interest is like already having a mortgage! I hope you and wife will lower your standard of living short term to clear this albatross as quickly as possibly, throwing as much directly to principal as possible along with your required payment. Use tax rebate which results from SL interest, take a part time job if you must - get this horror behind you. You don't want to add $ 41,000. in interest to this debt totalling $ 210,000.

[Petunia 100]

Now, I have to ask this one more time...

Is there some way that I can get a lower interest rate? As an investor, I would love to own the student loans debt of borrowers that were unlikely to default. I could determine the likelyhood of default based on his/her credit history, university student loan default rate, and income level. If you pooled a few hundred MBA student debt loans from top 25 programs, I bet you could attract lots of investors, even at a yield as low as 4%.

So, can't I make that case to someone? Isn't there some lending institution that sees the benefit in this?

I just want to make sure their isn't some angle/avenue that I am missing....


Thanks

I bet you couldn't. 4% for an uncollateralized (read "high risk") long-term bond is a terrible investment.

You could try looking for personal loans offered at lower rates of interest. The catch is that they typically have a short payoff, 3 years or so.

You might consider 0% credit card offers with no balance transfer fees, but be careful not to transfer more than you can pay off during the 0% period.

Example: you know you can comfortably pay 3k per month for a year, plus the minimum payment on the remaining student loan debt. So, get a no fee balance transfer offer at 0% and transfer 36k to it. Your student loans immediately begin accruing less interest. You pay 3k per month on the credit card as well as continue to make the minimum payments (more if possible) on your student loans. In a year, the credit card is paid in full and you can repeat the cycle.

[thrain]

I bet you couldn't. 4% for an uncollateralized (read "high risk") long-term bond is a terrible investment.

I disagree. The default rate on student loan debt at the University I attend is 1%. All other universities that offer a MBA program ranked in the top 50 have comparable default rates (0-2%). The median salary and employment figures are easy to find.


** I cannot yet post URLs, but the data source for the university default rate is WSJ. Go to see the article, google "A Degree Drawn in Red Ink" **

You could try looking for personal loans offered at lower rates of interest. The catch is that they typically have a short payoff, 3 years or so.

Thanks -- I wil give this a shot.

You might consider 0% credit card offers with no balance transfer fees, but be careful not to transfer more than you can pay off during the 0% period.

Example: you know you can comfortably pay 3k per month for a year, plus the minimum payment on the remaining student loan debt. So, get a no fee balance transfer offer at 0% and transfer 36k to it. Your student loans immediately begin accruing less interest. You pay 3k per month on the credit card as well as continue to make the minimum payments (more if possible) on your student loans. In a year, the credit card is paid in full and you can repeat the cycle.

That's great. Thank you

[annibe11e]

I consolidated my sub and unsub through FedLoan Servicing at 5.25%. You could look into that.