Student Loan Repayment

[Teelee]

For example: If you have 20k (at 6.8% interest) in student loan and about to head to graduate school, you have several options.

1) Pay off your 20K in the next 2 years paying approximately 1k/month. While in grad school, you would have finished paying off your entire loan and be debt free (= save more than 6k in interest). You will not have the freedom to do much other than paying off school loans and live very frugally.

2) Pay the minimum interest (approx. $300/month) and still have 18k loan left at the end of grad school. You can use that extra $700/month on other things like mortgage, investment in addition to having money if you run into trouble. You never know when you will need that extra cash. For example, if you suddenly have financial crisis, you can never take the 10k you paid back in student loans last year to buy something this year (the money is gone).

3) Defer while in school and accumulate another 9K in interest (=29k owed in 6 years).

[hejduk]

I would personally defer, but really everyone's financial situation is completely different. Do your budget, and if you can swing it, then do it.

If you can't, then just defer them. Also remember to keep plugging away at savings and an emergency fund.

Edited April 26, 2011 by hedjuk

[dudedolittle]

I'll be frank about my financial situation. My stipend is 19K for 9 months and going to make for meager living in pricey area I am going to school. I'm setting a budget and hopefully it works. If I can save some money from my stipend I think that is great, but I doubt very highly that will be the case. Even with tuition waived I still think the cost of books and fees could add up to near 2K a year or more.

I plan on taking all my alloted Stafford loans. Again,my tuition is waived so I don't need them, but I have a 35K private loan from undergrad that I am going to pay down with the Stafford loans. I have great credit and the interest rate on my private loan is lower (3%), but there is no flexibility in terms of payback, and I also used a great deal of my forbearance taking a year off between grad school. At least with federal debt I am eligible for income-based repayment and loan forgiveness in occupations that I might be involved with. The payback with private loans is relentless, and the general consensus seems to be that federal debt is much better than private debt and I want flexibility with repayment. Maybe this irrational? If so, I'm open to that and would like to hear why.

[rising_star]

For example: If you have 20k (at 6.8% interest) in student loan and about to head to graduate school, you have several options.

1) Pay off your 20K in the next 2 years paying approximately 1k/month. While in grad school, you would have finished paying off your entire loan and be debt free (= save more than 6k in interest). You will not have the freedom to do much other than paying off school loans and live very frugally.

2) Pay the minimum interest (approx. $300/month) and still have 18k loan left at the end of grad school. You can use that extra $700/month on other things like mortgage, investment in addition to having money if you run into trouble. You never know when you will need that extra cash. For example, if you suddenly have financial crisis, you can never take the 10k you paid back in student loans last year to buy something this year (the money is gone).

3) Defer while in school and accumulate another 9K in interest (=29k owed in 6 years).

I wouldn't do any of these. Well, I guess I would defer and then try to make at least the interest payments. But really, I would take out the max subsidized Stafford loans and use those to pay off the other loan. The key being *subsidized* because on those the government pays the interest while you are in school and until 6 months following your graduation.

I'll be frank about my financial situation. My stipend is 19K for 9 months and going to make for meager living in pricey area I am going to school. I'm setting a budget and hopefully it works. If I can save some money from my stipend I think that is great, but I doubt very highly that will be the case. Even with tuition waived I still think the cost of books and fees could add up to near 2K a year or more.

I plan on taking all my alloted Stafford loans. Again,my tuition is waived so I don't need them, but I have a 35K private loan from undergrad that I am going to pay down with the Stafford loans. I have great credit and the interest rate on my private loan is lower (3%), but there is no flexibility in terms of payback, and I also used a great deal of my forbearance taking a year off between grad school. At least with federal debt I am eligible for income-based repayment and loan forgiveness in occupations that I might be involved with. The payback with private loans is relentless, and the general consensus seems to be that federal debt is much better than private debt and I want flexibility with repayment. Maybe this irrational? If so, I'm open to that and would like to hear why.

This is a solid plan. But, I wouldn't bother taking out the unsubsidized Stafford loans in your situation (which you will be allotted and eligible for), just because the interest rate on those is higher than the interest rate on your private loan.

[dudedolittle]

I hear that. My conundrum is if I leave grad school after 2 years with an MA I wouldn't have the private loan paid off. I know it is illogical but I feel like trading private terms for government terms would buy me a lot of piece of mind if I left grad school after 2 years. I'm weird, right?

I wouldn't do any of these. Well, I guess I would defer and then try to make at least the interest payments. But really, I would take out the max subsidized Stafford loans and use those to pay off the other loan. The key being *subsidized* because on those the government pays the interest while you are in school and until 6 months following your graduation.

This is a solid plan. But, I wouldn't bother taking out the unsubsidized Stafford loans in your situation (which you will be allotted and eligible for), just because the interest rate on those is higher than the interest rate on your private loan.

[Teelee]

When you defer your loans and you have both subsidized and unsubsidized loans, can you specify which one you want to pay off first?

[rising_star]

I hear that. My conundrum is if I leave grad school after 2 years with an MA I wouldn't have the private loan paid off. I know it is illogical but I feel like trading private terms for government terms would buy me a lot of piece of mind if I left grad school after 2 years. I'm weird, right?

That makes no sense at all. You'd be trading a 3% interest rate for 6.8%, meaning that the government loans will cost you longer over the lifetime of the loan. Moreover, if you are taking out unsubsidized loans, the 6.8% interest will be accruing while you're in school. So you're basically trading lower payments for higher payments. Take out the max in Stafford subsidized loans ($8500/year) and use that to pay down your private loan debt while you're in school. But, you're still putting yourself in a bizarre situation post-graduation since you'll have a higher interest rate to deal with. Actually, the best idea might be to to just leave things the way they are now that I think about it. You're not going to save much money on interest, you'll just give yourself more breathing room in your monthly budget temporarily.

[HandsomeNerd]

That makes no sense at all. You'd be trading a 3% interest rate for 6.8%, meaning that the government loans will cost you longer over the lifetime of the loan.

Actually, as a graduate student, there appears to be no difference between subsidized and unsubsidized stafford loans: they both clock in at 6.8%. http://studentaid.ed.gov/PORTALSWebApp/students/english/studentloans.jsp?tab=funding

What are the current interest rates?

Direct Subsidized Loans:

• Undergraduate students—If the first disbursement of your subsidized loan is between July 1, 2010 and June 30, 2011, the interest rate on your loan is fixed at 4.5%. The interest rate on subsidized loans first disbursed to undergraduate students between July 1, 2011 and June 30, 2012 will be fixed at 3.4%.
  
  
• Graduate and professional degree students—The interest rate is fixed at 6.8%.

Direct Unsubsidized Loans—The interest rate is fixed at 6.8% for all borrowers (undergraduate and graduate).

Edited April 27, 2011 by HandsomeNerd

[dudedolittle]

I hear what rising star is saying in terms of what accrues interest and when and how that occurs. On the surface it does not make sense.

What my massive private loan doesn't qualify for is income-based repayment (IBR) or loan forgiveness for public service. Federal debt comes with those terms and IBR is something that I think is huge for someone who might realistically end up as a researcher at a non-profit or in a slow job recovery.

What federal student loans are eligible to be repaid under an IBR plan?

All Stafford, PLUS and Consolidation Loans made under either the Direct Loan or FFEL Program are eligible for repayment under IBR, EXCEPT loans that are currently in default, parent PLUS Loans (PLUS Loans that were made to parent borrowers), or Consolidation Loans that repaid parent PLUS Loans. The loans can be new or old, and for any type of education (undergraduate, graduate, professional, job training).

What are the benefits of IBR?

• PAY AS YOU EARN — Under IBR, your monthly payment amount will be less than the amount you would be required to pay under a 10-year standard repayment plan, and may be less than under other repayment plans. Although lower monthly payments may be of great benefit to a borrower, these lower payments may result in a longer repayment period and additional accrued interest.
• INTEREST PAYMENT BENEFIT — If your monthly IBR payment amount does not cover the interest that accrues on your loans each month, the government will pay your unpaid accrued interest on your Subsidized Stafford Loans (either Direct Loan or FFEL) for up to three consecutive years from the date you began repaying your loans under IBR.
• 25-YEAR CANCELLATION — If you repay under the IBR plan for 25 years and meet certain other requirements, any remaining balance will be canceled.
• 10-YEAR PUBLIC SERVICE LOAN FORGIVENESS — If you work in public service, on-time, full monthly payments you make under IBR (or certain other repayment plans) while employed full-time in a public service job will count toward the 120 monthly payments that are required to receive loan forgiveness through the Public Service Loan Forgiveness Program. Through this program, you may be eligible to have the remaining balance of your Direct Loans forgiven after you have made the 120 qualifying as described above. The Public Service Loan Forgiveness Program is available only for Direct Loans. If you have FFEL loans, you may be eligible to consolidate them into the Direct Loan Program to take advantage of the Public Service Loan Forgiveness Program. However, only the on-time, full monthly payments made under IBR or certain other repayment plans while you are a Direct Loan borrower will count toward the required 120 monthly payments. For more information about this program, review the Department’s Public

Table here: http://studentaid.ed.gov/PORTALSWebApp/students/english/IBRPlan.jsp

Actually, as a graduate student, there appears to be no difference between subsidized and unsubsidized stafford loans: they both clock in at 6.8%. http://studentaid.ed...jsp?tab=funding

Edited April 27, 2011 by dudedolittle

[dudedolittle]

I should also mention my family is cosigned on the private loan and I'm just no comfortable with that.

[fumblewhat]

I should also mention my family is cosigned on the private loan and I'm just no comfortable with that.

Hmmm. It really only seems to make sense to switch to the Stafford loans (and their higher interest, and thus eventual greater expense to you) if you are confident that you're not going to have the ability to make your payments on your current loan. (That's also the only case -- that I can think of -- where it would matter if your parents were cosigned.) If that's the case, it might make sense to switch to governement loans for the IBR option. However the IBR description you posted clearly stated that "these lower payments may result in a longer repayment period and additional accrued interest." In other words, it'll cost you more money. You'd going to be adding insult to the injury of the already higher interest rate.

If you're sure that you won't be able to make your payments, that'd be one thing... I don't have any answers for you, but it seems pretty clear that taking the Stafford loans will result in you losing money. (I welcome correction on this point, if I'm mistaken!)

[rising_star]

Actually, as a graduate student, there appears to be no difference between subsidized and unsubsidized stafford loans: they both clock in at 6.8%.

I never said they had different interest rates. The difference is that on a subsidized loan, the federal government pays the interest while you are in school and until 6 months after graduation. With an unsubsidized loan, the interest accrued is added on to the loan amount. So, if you borrow $3000 with a subsidized Stafford loan, you will owe $3000 when you start paying 6 months after graduation. If you borrow $3000 on an unsubsidized Stafford loan and spend 2 years in school, you will owe $3000 + interest of 2 years. Big difference.

[dudedolittle]

I hear everyone. I guess there is no rush to switch debt for debt in the first year. I am allotted all the Subsidized Stafford Loans. It would just take 4 years of that to switch the debt out.

I realize it may result in higher debt. However, for someone looking to work for government agencies and non-profits I don't think I am going to be able to bank on a huge salary even with a graduate degree. I'm goinf to school for children's policy research. It goes without saying that without a graduate degree I'm not going to be able to enter the field and with a degree I am not looking at a fat salary if I leave with just an MA or if I had a Ph.D. 10 years at a non-profit or government agency and your federal debt is forgiven. I'm also reading further on this, but I don't think the 10 years needs to be consecutive either. So, if I start at a non-profit for 5 years then move somewhere else my time counts towards the 10 years. Ideally, no one should be paying on loans for 25 years. However, having a safety net just in case is something that is nice given the horror stories I've heard with people who work at non-profits and have private debt.

Ya, I was 19 and a first generation college student when I took a loan for 30K for a year of school. In retrospect I and my family should not have done it, but at that time we were all pretty uninformed and it all happened really fast. If I hit a financial hardship I'd prefer to not have my parents on the hook for that loan.

i should also add there is nothing that prevents you from entering into IBR with a lower monthly payment, but making the standard 10 year payment. If times get tough you have a safety net.

I'll look at it and think about it more.

I appreciate everyone's feedback. As a first generation student the debt scares me every day. Granted grad school is paid for. I might need a couple extra thousand to supplement my stipend, but full tuition remission and a 19K stipend for 9 months makes breathing a bit easy. I was just wondering about creative things I could do with the stafford loans I am offered to help mitigate the private loan. Maybe there really isn't anything worth doing with that money in the end, and I can just send it back, but this dialogue helps. I do know that having large debt from undergrad has made me seriously contemplate bagging grad school after 2 years if I can get a job that pays well, but also fulfills a lot of what would keep me interested in a job on a day to day basis. I want the Ph.D., but all those lost earnings with the debt compounding I feel like might make that thought something that can't be realized.

Edited April 27, 2011 by dudedolittle

[dudedolittle]

Thinking further. The terms of my private loans are fixed at 3.4 %. I had great credit at 19 and my parents had amazing credit. Not many people have fixed interest rates. So, this might be dumb. What if I took the subsidized stafford loans necessary to pay interest that would accrue on the private loan and my unsubsidized loans from undergrad. Would this be dumb?

Edited April 27, 2011 by dudedolittle

[fumblewhat]

Thinking further. The terms of my private loans are fixed at 3.4 %. I had great credit at 19 and my parents had amazing credit. Not many people have fixed interest rates. So, this might be dumb. What if I took the subsidized stafford loans necessary to pay interest that would accrue on the private loan and my unsubsidized loans from undergrad. Would this be dumb?

OK, let's think this through. Here's an accrued interest calculator:

My linkhttp://www.collegeanswer.com/financing/lt_financial_planning/ltfp_accint.jsp

Someone please correct me if I'm getting this wrong here! God knows I'm no expert. But let's say that you had 30,000 in debt at 3.4% interest. Your current monthly interest payment would be $85. Assuming you didn't have to make payments for 24 months while you were in graduate school, but interest still accrued, when you left school you'd have $2040 in increased debt, bringing you to $32,040. Your new monthly interest payment on that would be $91 -- a $6 increase.

So there's that. But let's say that instead of doing that, you took out a subsidized Stafford loan for $2040 to cover that interest. You wouldn't have any payments in the short term, but after your grace period, you'd be making payments (minimum $50/month on Stafford loans) plus interest. The interest would come to $12/ month. Because of the minimum Stafford payment, you'd finish paying off this loan in under 4 years, and you'd have accumulated $286 of interest in that time. (I figured this information out here: http://www.collegean...fp_monthrep.jsp).

This is what you'd be looking at with the Stafford Loan:

Stafford Loan

Time it takes to pay off $2040: 3.88 years

Initial amount interest you would pay on the $2040: $12/month

Total repaid (from here): $2040 principle + $286 interest total = $2326.

This is where I think I might be reaching the limits of my usefulness to you, since figuring out the total cost of letting the interest accrue on your private is more complicated (/makes my head hurt). However, it seems like if you just let the interest accrue, instead of taking on the Stafford loan, you'd end up paying less in monthly payments and spend less money overall. I'll leave the math to someone better at it, but let me explain my thinking.

The length of time it would take you to pay off $2040 added interest on your private loan depends on the monthly payment, which I don't know. But assuming you have to pay $32040 (30,000 plus accrued interest) back in 10 years, the payment should be something like $315 (from here). That means that you would pay off the accrued interest in 7 months with an interest of 3.4%, which seems better than 4 years at 6.8% for Stafford. Also consider what your monthly payments would look like. If you took out the Stafford to cover the interest, your initial payments for the private loan would be $295/month plus your Stafford payment which would be $50 (minimum payment, assuming interest is included?). That's $345 a month, and you'd be paying close to that for the duration of the Stafford loan (just under 4 years). If you just let the interest accrue on your private loan, assuming you have 10 years to pay off 32,040, your initial payments would again be about $315.

Take from all that what you will. Again, I'm no expert and I may have it all wrong. Do check out the loan repayment I linked several times above. You could put in your real numbers and figure it out yourself.

By the way, a $19,000 stipend is quite healthy, depending on the area you'll be living in . You could also just apply $1020 of that toward the first 12 months of your interest payments, if you'd like to keep current with them. That's personally what I would do.

Edited April 28, 2011 by fumblewhat