Paying down a big chunk of debt

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Anonymous User
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Paying down a big chunk of debt

Postby Anonymous User » Wed Dec 12, 2012 1:44 am

Let's say a person is about to get a big hunk of money (say, about half of his law school debt) to apply towards his loans. Can you tell your servicer how to distribute the money across the loans or do you not get any say over that (or does it vary servicer to servicer)? Is there a smart way to apply, say, $100k to your loans (assuming you have more thank $100k of loans)? Interest just gets capitalized anyway, right? Pay older loans first bc they are bigger (due to interest accrual)?

Sup Kid
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Re: Paying down a big chunk of debt

Postby Sup Kid » Wed Dec 12, 2012 2:32 am

Easy -- pay highest interest loans first, and go down from there. So if you have 80k in loans (say 20k in PLUS and 60k in Stafford), and you come into 50k, pay off the PLUS loans in their entirety and put the other 30k towards Stafford loans.

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thesealocust
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Re: Paying down a big chunk of debt

Postby thesealocust » Wed Dec 12, 2012 9:20 am

Sup Kid wrote:Easy -- pay highest interest loans first, and go down from there.


TITCR.

People who advocate any other strategy do so for psychological reasons. "debt snowballing" (paying down smaller loans first) is all about getting into good habits and feeling good about closing accounts. Paying off older accounts first doesn't make sense from really any perspective as far as I know.

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Re: Paying down a big chunk of debt

Postby Anonymous User » Wed Dec 12, 2012 10:59 am

thesealocust wrote:
Sup Kid wrote:Easy -- pay highest interest loans first, and go down from there.


TITCR.

People who advocate any other strategy do so for psychological reasons. "debt snowballing" (paying down smaller loans first) is all about getting into good habits and feeling good about closing accounts. Paying off older accounts first doesn't make sense from really any perspective as far as I know.



Only bc older accounts have the largest principal (bc interest has been capitalized into it over time). So, assuming you have 150k of 3 loan disbursements all at same interest rate you should pay off the largest (oldest) first bc interest rate * largest number results in largest interest accrual amount.

bdubs
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Re: Paying down a big chunk of debt

Postby bdubs » Wed Dec 12, 2012 12:50 pm

Anonymous User wrote:
thesealocust wrote:
Sup Kid wrote:Easy -- pay highest interest loans first, and go down from there.


TITCR.

People who advocate any other strategy do so for psychological reasons. "debt snowballing" (paying down smaller loans first) is all about getting into good habits and feeling good about closing accounts. Paying off older accounts first doesn't make sense from really any perspective as far as I know.



Only bc older accounts have the largest principal (bc interest has been capitalized into it over time). So, assuming you have 150k of 3 loan disbursements all at same interest rate you should pay off the largest (oldest) first bc interest rate * largest number results in largest interest accrual amount.


You don't seem to understand how interest works. Just look at the rate, the principal amount is irrelevant.

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dingbat
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Re: Paying down a big chunk of debt

Postby dingbat » Wed Dec 12, 2012 1:02 pm

bdubs wrote:Only bc older accounts have the largest principal (bc interest has been capitalized into it over time). So, assuming you have 150k of 3 loan disbursements all at same interest rate you should pay off the largest (oldest) first bc interest rate * largest number results in largest interest accrual amount.


You don't seem to understand how interest works. Just look at the rate, the principal amount is irrelevant.[/quote]
Yup

For example:
Loan 1: $65k at 5% (annual interest is $3.25k)
Loan 2: $55k at 5% (annual interest is $2.75k)
Loan 3: $45k at 5% (annual interest is $2.25k)
Ability to pay $50k

No matter how the $50k gets distributed the annual interest remains the same:
Loan 1: $15k - interest is $0.75k
Loan 2: $55k - interest is $2.75k
Loan 3: $45k - interest is $2.25k
Total interest = $5.75k

Loan 1: $65k - interest is $3.25k
Loan 2: $50k - interest is $2.50k
Total interest = $5.75k

However, I also think that if you have different loans all at the same rate, and it's possible to pay one off in its entirety, this is highly advisable.
For example (different numbers)
Monthly payment on loan 1 = $150
Monthly payment on loan 2 = $100
Monthly payment on loan 3 = $50
Total time remaining on all loans is 25 months.

If payment is applied equally, total time remaining becomes 20 months, and will cost a total of $300 per month

If loan 3 is paid off in its entirety, you've got two options:
Monthly payment on loan 1 = $150 - paid off in 25 months
Monthly payment on loan 2 = $100 - paid off in 25 months
(total monthly payment of $250)
OR
Monthly payment on loan 1 = $180 - paid off in 20 months
Monthly payment on loan 2 = $120 - paid off in 20 months
(total monthly payment of $300)

TCR would be to select option 2 - keep paying the same amount every month and finish early. However, doing it this way gives the added flexibility that if you ever need some extra cash, you can reduce payments for one or both of the loans down to the original amounts, and pocket the difference - to be used for emergencies only (make sure you have enough self-control)




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