Student Loan Payment Plan

Question

EDIT: the OUTSTAND_PRIN is the same as PRINCIPAL since I haven't begun paying down yet, but am saving like I am paying until my 6 months is up, just in case i need the extra $3,600 for an emergency beforehand.

Here is my situation: all of my student loans are through FAFSA and I want to pay them back as soon as possible. I'm thinking about my options here and I have an idea of going down two different routes.

1) 10 year plan with payments around ~$600/mo. Since I've budgeted for two paychecks/mo and I am paid bi-weekly, I plan on paying two extra checks, or around ~3,000/year, down on my loans. Additionally I'm thinking of upping my payment to $800/mo, and most likely higher after a year or so.

2) 25 year plan with payments around ~$323/mo. Here I would have lower monthly payments, hence more flexibility, in case an emergency came up. My thought process is to do the lower monthly payments and still pay ~$600-$800/mo down, same deal with the extra paychecks, and hopefully increasing my payment in a year or two.

LN; PRINCIPAL;   DATE;      OUTSTAND_PRIN; INTEREST_ACCR; INT_RATE;
-------------------------------------------------------------------
 1. SUB   $3,500 08/17/2010 $3,500         $    0         4.5%
 2. UNSUB $2,000 08/17/2010 $2,000         $  715         6.8%
 3. UNSUB $4,000 08/17/2010 $4,000         $1,431         6.8%
 4. SUB   $3,500 08/13/2011 $3,500         $    0         3.4%
 5. UNSUB $2,000 08/13/2011 $2,000         $  580         6.8%
 6. UNSUB $4,000 08/13/2011 $4,000         $1,161         6.8%
 7. SUB   $1,000 01/09/2012 $1,000         $    0         3.4%
 8. SUB   $4,500 08/14/2012 $4,500         $   16         3.4%
 9. UNSUB $2,000 08/14/2012 $2,000         $  445         6.8%
10. UNSUB $1,500 08/14/2012 $1,500         $  354         6.8%
11. UNSUB $1,200 01/04/2013 $1,200         $  251         6.8%
12. SUB   $5,500 08/20/2013 $5,500         $   23         3.9%
13. UNSUB $2,000 08/20/2013 $2,000         $  175         3.9%
14. UNSUB $  991 01/30/2014 $  991         $   77         3.9%
15. SUB   $2,500 08/27/2014 $2,500         $    0         4.7%
16. UNSUB $  496 08/27/2014 $  496         $   33         4.7%
17. UNSUB $  754 09/05/2014 $  754         $   49         4.7%
18. UNSUB $2,500 09/05/2014 $2,500         $  164         4.7%
19. UNSUB $2,228 01/21/2015 $2,228         $  142         6.2%
20. UNSUB $1,843 08/14/2015 $1,843         $   50         5.8%

1. TOTAL LOAN BALANCE: $53,678
2. TOTAL PRINIPAL: $48,012
3. TOTAL INTEREST ACCRUED: $5,666
4. WEIGHTED AVERAGE INT : 5.3%

My plan is to drop the payments to around ~$320/mo by switching to 25/yr plan and make these additional payments on to my principal, advising my federal loan servicer to pay me oldest, highest interest rate, loans first. This will pay off the loans that are accruing the most interest monthly first, and leave my room to drop down my payments for a few months if need be.

Does this sound like a viable plan? When I do an amortization table my answer comes out to be the same amount of interest paid, but it's not taking into account in which order it's being paid off in, but rather the extra payments being distributed evenly to all the loans. Is this the best way to tackle this? Not sure how to calculate it based on the order I'm paying off.

For this calculation could we assume I'm doing $800/mo in perpetuity.

Answer 1

The bottom line is that you have a viable plan. I'd also account for raises and bonuses. You are winning by having a plan and a budget, you will be much more efficient that way. Also you may want to look at your withholding. The standard w-4 form typically leaves people with getting a large return, or owing a lot of money. Aim for a zero refund.

There are two schools of thought: Pay them off from largest to smallest interest rate; or pay them off smallest to largest balance. Clearly the first is more mathematically efficient, no question. The second only has merit because of emotions.

As stated in your comments, you are somewhat depressed given your conservative repayment schedule. I am going to assume $325 is your minimum payment, and you can find $800 per month to pay, making a $475 extra principle payment. Currently you have 20 loans. If you go smallest to largest, in 7 months you will only have 16 loans with a start on #5. That would feel pretty good right?

If you went from largest interest rate, you could pay off one loan and start on a second.

By doing the balance method there would be about a $55 amount of interest rate inefficiency in the course of 7 months. However, if by using the balance method and are so encouraged by your progress you find another $100/month to attack the debt the amount of inefficiency becomes meaningless.

Another added benefit of using the low balance method is that your minimum payment goes down each time a loan is paid off allowing more agility in one's budget.

For me, the low balance method worked the best and I am a math guy. That being said, if I found myself with $2300, I'd pay off one of those 6.8% 2K loans, and throw the remaining 300 at the smallest.

For your reference, here is your loans listed from smallest to largest:

$496 08/27/2014 $496 $33 4.7%
$754 09/05/2014 $754 $49 4.7%
$991 01/30/2014 $991 $77 3.9%
$1,000 01/09/2012 $1,000 $0 3.4%
$1,200 01/04/2013 $1,200 $251 6.8%
$1,500 08/14/2012 $1,500 $354 6.8%
$1,843 08/14/2015 $1,843 $50 5.8%
$2,000 08/20/2013 $2,000 $175 3.9%
$2,000 08/17/2010 $2,000 $715 6.8%
$2,000 08/13/2011 $2,000 $580 6.8%
$2,000 08/14/2012 $2,000 $445 6.8%
$2,500 08/27/2014 $2,500 $0 4.7%
$2,500 09/05/2014 $2,500 $164 4.7%
$2,228 01/21/2015 $2,228 $142 6.2%
$3,500 08/13/2011 $3,500 $0 3.4%
$3,500 08/17/2010 $3,500 $0 4.5%
$4,000 08/17/2010 $4,000 $1,431 6.8%
$4,000 08/13/2011 $4,000 $1,161 6.8%
$4,500 08/14/2012 $4,500 $16 3.4%
$5,500 08/20/2013 $5,500 $23 3.9%

Answer 2

I think your plan sounds entirely reasonable and like a very good idea. In particular, signing up for the longer 25-year payoff plan with the understanding that you will make higher payments and therefore pay things off more quickly sounds like a great idea because, as you say, it leaves you with the flexibility to drop payments to only $320 per month if/as life happens.

I think the main question is whether your loan servicer will correctly apply the extra payments. If you are able to easily ensure that additional payments go to principal of the highest rate loan (or loans), then all should be good.

Within all the loans at a given interest rate, I would apply extra payments to the smallest loans first for the psychological boost and decrease in minimum payment mentioned in Pete's answer, but this is clearly a personal (and relatively unimportant) decision.

Answer 3

I copied Pete's data and re-sorted to show by interest rate. What stands out to me is that the balance at 6.8% ($16,700) is nearly as high as the 3.4-3.9% balance ($17,491) yet costing nearly twice the interest.

If we call the difference 3% to keep the math simple, the high rate chunk costs you $500/yr more than the low rate chunk.

I'm sympathetic to those who feel great about paying off 5 different 6% credit cards with sub $2000 balances who are left with only one card carrying a 24% rate on a $10K balance. But, in your case, you have 20 loans, and you must already have it all set up to make these payments. Just make the extra payments to the 6.8% debt, you can target the lowest balance s0 long as it's 6.8%. You'll be canceling off one loan every few months, but you'll see the annual accruing interest drop by the optimum amount.

The low balance? They'll fall off at some point anyway, given how high the payment is compared to the remaining balances.

Answer 4

i think you have a viable plan, but here are a few other things to consider:

1. you will probably have to set up automatic payments for your "minimum due", then manually make a payment each month to a specific loan in addition to the minimum. but it depends on your servicer. you may be able to set up an additional automatic monthly payment on a specific loan, but i don't think any servicer will let you set up an automatic payment that automatically switches to the next-highest-interest loan.
2. student loan interest is tax deductable, so paying down a 6.8% loan might make sense, paying a 3.4% loan probably doesn't. personally, i would pay down to around 5%, then focus on other uses for my money. also, it is worth noting that there are income limits on deducting student loan interest (65k-80k$ phase out in 2016)
3. "other uses" include an emergency fund (you seem to have covered), getting 401k matching (which you should also do before paying down this debt), ira, and hsa funding. dave ramsey has a nice general-purpose plan.
4. since you seem math-fluent, i would encourage you to apply this same analysis to all your financial decisions. notably, you should focus on reducing your taxes in general. for starters, you could look into managing capital gains/loss realization. doing so can effectively convert earned income into long-term capital gains, which can make you money even when you have a net capital loss on your investments.
5. you might consider avoiding paying off the last loan. leaving a 100$ balance can keep the loan on your credit report for years at the cost of pennies per month.