Student loan payments: get advice and actual numbers here

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Tiago Splitter
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Re: Student loan payments: Actual numbers

Postby Tiago Splitter » Fri Nov 18, 2016 8:46 pm

Anonymous User wrote:Need some assurances that I am doing the right thing here:

I am a 2016 graduate with a 180k biglaw gig. I owe about 200k in student loans but also around 15k in credit card debt. I am not looking to be chastised about the cc debt--I know it's terrible and all that and I've learned my lesson. My question is: Should I go on IBR (already applied and was approved using last year's tax return) and make minimal payments on those student loans (~$150/mo) until my cc debt is paid off? And then refinance my student loans and start attacking that? I think this is the right plan since my cc debt obviously has much higher interest rates than my student loans. However, I just hate the fact that my already massive amount of student loans will just be growing for a while. Advice/thoughts/comments?

Is there any reason to use IBR instead of PAYE/REPAYE?

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Re: Student loan payments: Actual numbers

Postby Anonymous User » Fri Nov 18, 2016 8:50 pm

Tiago Splitter wrote:
Anonymous User wrote:Need some assurances that I am doing the right thing here:

I am a 2016 graduate with a 180k biglaw gig. I owe about 200k in student loans but also around 15k in credit card debt. I am not looking to be chastised about the cc debt--I know it's terrible and all that and I've learned my lesson. My question is: Should I go on IBR (already applied and was approved using last year's tax return) and make minimal payments on those student loans (~$150/mo) until my cc debt is paid off? And then refinance my student loans and start attacking that? I think this is the right plan since my cc debt obviously has much higher interest rates than my student loans. However, I just hate the fact that my already massive amount of student loans will just be growing for a while. Advice/thoughts/comments?

Is there any reason to use IBR instead of PAYE/REPAYE?


Ah, I am doing REPAYE. MY bad. Isn't REPAYE a form of IBR? (the lingo confuses me)

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Tiago Splitter
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Re: Student loan payments: Actual numbers

Postby Tiago Splitter » Fri Nov 18, 2016 8:55 pm

Anonymous User wrote:
Tiago Splitter wrote:
Anonymous User wrote:Need some assurances that I am doing the right thing here:

I am a 2016 graduate with a 180k biglaw gig. I owe about 200k in student loans but also around 15k in credit card debt. I am not looking to be chastised about the cc debt--I know it's terrible and all that and I've learned my lesson. My question is: Should I go on IBR (already applied and was approved using last year's tax return) and make minimal payments on those student loans (~$150/mo) until my cc debt is paid off? And then refinance my student loans and start attacking that? I think this is the right plan since my cc debt obviously has much higher interest rates than my student loans. However, I just hate the fact that my already massive amount of student loans will just be growing for a while. Advice/thoughts/comments?

Is there any reason to use IBR instead of PAYE/REPAYE?


Ah, I am doing REPAYE. MY bad. Isn't REPAYE a form of IBR? (the lingo confuses me)

I figured you might be using it as a generic term. IBR is the old one where you had to pay 15%, honestly not sure if it's used anymore.

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Mr. Peanutbutter
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Re: Student loan payments: Actual numbers

Postby Mr. Peanutbutter » Fri Nov 18, 2016 9:07 pm

I find checking my score using credit karma after making giant CC payments helps "gamefy" the experience and gives you enough of a boost to keep going. Watching my score go up 25 points probably felt a lot better than watching my loan balance go from like 215k to 214k.

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Re: Student loan payments: Actual numbers

Postby JenDarby » Sat Nov 19, 2016 1:09 am

Mlk&Ckies wrote:I find checking my score using credit karma after making giant CC payments helps "gamefy" the experience and gives you enough of a boost to keep going. Watching my score go up 25 points probably felt a lot better than watching my loan balance go from like 215k to 214k.

Don't worry, it will be 223k in a few weeks!

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Re: Student loan payments: Actual numbers

Postby Anonymous User » Tue Nov 22, 2016 9:05 am

Anonymous User wrote:Need some assurances that I am doing the right thing here:

I am a 2016 graduate with a 180k biglaw gig. I owe about 200k in student loans but also around 15k in credit card debt. I am not looking to be chastised about the cc debt--I know it's terrible and all that and I've learned my lesson. My question is: Should I go on IBR (already applied and was approved using last year's tax return) and make minimal payments on those student loans (~$150/mo) until my cc debt is paid off? And then refinance my student loans and start attacking that? I think this is the right plan since my cc debt obviously has much higher interest rates than my student loans. However, I just hate the fact that my already massive amount of student loans will just be growing for a while. Advice/thoughts/comments?


Have you looked into a balance transfer? I regularly get offers in the mail from my current ccs telling me they'll give me 0% for 18months on a balance transfer.

One cc would be a 3% fee up front. Other is 0.

You should still prioritize ending the cc debt, but at least carry it at zero if you can.

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Re: Student loan payments: Actual numbers

Postby dwyf » Tue Nov 22, 2016 9:08 am

Estimates on what a Trump 12.5% plan would look like for an NYC big law first or second year? Assume full shot loans.

What is is 12.5% of discretionary income?

Also, has he discussed modifying interest rates (as hrc did)?

Thanks,

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Re: Student loan payments: Actual numbers

Postby Anonymous User » Tue Nov 22, 2016 11:05 am

To the poster above dealing with CC debt: Alliant Credit Union allows for a balance transfer with 0% interest for 12 months. I had some CC debt related to my time studying from the bar, and it was very helpful. Hopefully you qualify.

Question on another topic: I just refinanced my student loans. How does student loan interest deduction work? I assume I don't get to claim the credit based on my lender paying off my loans, correct? How do I separate the interest I paid from the interest that the refinancing lender paid for me? Will my original lender do that for me?

Thanks.

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Re: Student loan payments: Actual numbers

Postby JenDarby » Tue Nov 22, 2016 11:26 am

When I refinanced my 1098e from my Gov loan servicer included interest paid for by my new loan servicer. Think of it this way, it doesn't really matter where you get the money to pay your interest, you paid it

if you refinanced, i imagine you likely have a decent/high income, so I'd be more concerned about phaseouts for qualifying for student loan interest deduction (2016 - MAGI of 80k for a single filer and 160k for joint, with only $2,500 allowed as a deduction)

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Re: Student loan payments: Actual numbers

Postby Nebby » Tue Nov 22, 2016 11:53 am

Question: I am on PAYE and my monthly payments are zero since it's going off of my 2015 tax year. I plan on still making monthly payments because I have LRAP. Will these monthly payments count for PSLF, even though I'm not required to pay anything monthly?

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Re: Student loan payments: Actual numbers

Postby zot1 » Tue Nov 22, 2016 11:55 am

Nebby wrote:Question: I am on PAYE and my monthly payments are zero since it's going off of my 2015 tax year. I plan on still making monthly payments because I have LRAP. Will these monthly payments count for PSLF, even though I'm not required to pay anything monthly?


I think so because it should still be a "qualifying payment." Also, I'm just hoping this is true because I've made a few payments where my payment was supposed to just be $0.

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Re: Student loan payments: Actual numbers

Postby grand inquisitor » Tue Nov 22, 2016 11:56 am

Nebby wrote:Question: I am on PAYE and my monthly payments are zero since it's going off of my 2015 tax year. I plan on still making monthly payments because I have LRAP. Will these monthly payments count for PSLF, even though I'm not required to pay anything monthly?

if it counts as a qualifying monthly payment, then yes, so that's the crucial definition i guess. i would argue that if your required payment is $0 then you are making your qualified monthly payment.

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Re: Student loan payments: Actual numbers

Postby Nebby » Tue Nov 22, 2016 12:00 pm

zot1 wrote:
Nebby wrote:Question: I am on PAYE and my monthly payments are zero since it's going off of my 2015 tax year. I plan on still making monthly payments because I have LRAP. Will these monthly payments count for PSLF, even though I'm not required to pay anything monthly?


I think so because it should still be a "qualifying payment." Also, I'm just hoping this is true because I've made a few payments where my payment was supposed to just be $0.

grand inquisitor wrote:
Nebby wrote:Question: I am on PAYE and my monthly payments are zero since it's going off of my 2015 tax year. I plan on still making monthly payments because I have LRAP. Will these monthly payments count for PSLF, even though I'm not required to pay anything monthly?

if it counts as a qualifying monthly payment, then yes, so that's the crucial definition i guess. i would argue that if your required payment is $0 then you are making your qualified monthly payment.

Yep you're both right. I did some more searching and found this:

If my scheduled monthly payment under an income-driven plan is $0, does each month
during which my payment is $0 count toward the required 120 separate, monthly
payments?

Yes. Any month when your scheduled payment under an income-driven plan is $0 will count toward PSLF
if you also are employed full-time by a qualifying employer during that month.

https://studentaid.ed.gov/sa/sites/defa ... stions.pdf

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Re: Student loan payments: Actual numbers

Postby Nebby » Tue Nov 22, 2016 12:05 pm

Another question that I've been pondering:

My LRAP sends me two checks worth 6 months of loan payments each. one check in December and one in May. Since my 2017 PAYE plan is $0 a month, should I take my December check (which is $17k) and pay it all towards my loans, since I won't be required to pay anything else under PAYE? Or should I just make the standard repayment that my LRAP will cover (~2k/month)? I feel like the former option will make a bigger dent in the long haul, but at the same time I don't know how much it honestly matters since I'm planning on remaining on PAYE/PSLF/LRAP for the next 10 years

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Re: Student loan payments: Actual numbers

Postby Anonymous User » Sun Nov 27, 2016 5:12 am

Hi all,

So I hope this post isn't looked at as a flame or a brag of any kind. I realize I am more fortunate than most posting itt but as you will undoubtedly be able to tell I am also pretty incompetent and ignorant when it comes to finances so I am just looking for advice on the best way to go in my situation.

I am a current 3L and have about 45k (including accrued interest) in unsubsidized stafford loans, mostly taken out for COL during 1L and 2L. Half of that figure is at 6.21% and the other half is at 5.84%.

I have a big law job lined up paying market in NYC. I currently live with my gf in an apt. she owns in BK and I help her with the mortgage (my share is roughly $750 a month). Our plan is to stay here for as long as I can stand the small size of the apt. + far commute. I will definitely start at my job living here but could see moving after even 3-6 months if I really can't stand it (or staying for years if I can deal with it). Moving would entail selling the apt. and renting in MFH. We're likely to get married within the next 2-3 yrs.

Gf makes $90-100k (non legal career). She has no debt and has some savings but nothing crazy (sub $20k) outside of any equity she/we have built up in the apt (this is also minimal since the down payment was largely financed by a loan from her parents which she would have to pay back if she sold, and we have barely made a debt to the principal on the mortgage).

We probably live less frugally than most, and that is why we value the low rent payments. We both have cars (they're owned but still have insurance + normal expenses associated with car ownership--will likely get rid of one and share once I start working), we go out or order in quite frequently, and like to have extra money to randomly spend on gifts/clothing/alcohol/travel etc. If we move to MFH we will give up both cars. I realize whether we move is a big factor in this since it will literally double our monthly COL expenses, but I can't really put a pct. on it. Maybe 50/50?

Nonetheless, I recognize this is a pretty good spot to be in. What I am curious about is mainly whether it's best for our situation if I pay my loans super aggressively, super passively, or somewhere in between? I assume refinancing makes sense? Even if one of us lost his or her job, we could still afford to live/make loan repayments for a while. If paying super aggressively is the best strategy, should I/we start now if it's possible? I have some money in the bank from my 2L summer and between that and my gf's salary we could begin paying down the debt or at least the interest today if we wanted. At the same time, given that we like to have disposable income, might it be best to just pay whatever the minimum is knowing that we will pay a bunch of extra interest over the life of the loan but don't have to live exceptionally frugally for a year or two? The ultimate goal is to own a house or a multi-bedroom apt. somewhere in NYC metro, if it is ever possible. We know it could realistically take a very long time. We are both from NY and intend to stay here for the long-term.

If I do re-finance, when is the soonest I can do it? Also, what is the deal with capitalization of the interest on my loans? Should I pay off the interest before I graduate at the very least? Any other obvious basic advice you'd recommend to me as a financial illiterate?

Thanks.

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Re: Student loan payments: Actual numbers

Postby bk1 » Mon Nov 28, 2016 2:39 pm

Anonymous User wrote:What I am curious about is mainly whether it's best for our situation if I pay my loans super aggressively, super passively, or somewhere in between? I assume refinancing makes sense? Even if one of us lost his or her job, we could still afford to live/make loan repayments for a while. If paying super aggressively is the best strategy, should I/we start now if it's possible? I have some money in the bank from my 2L summer and between that and my gf's salary we could begin paying down the debt or at least the interest today if we wanted. At the same time, given that we like to have disposable income, might it be best to just pay whatever the minimum is knowing that we will pay a bunch of extra interest over the life of the loan but don't have to live exceptionally frugally for a year or two? The ultimate goal is to own a house or a multi-bedroom apt. somewhere in NYC metro, if it is ever possible. We know it could realistically take a very long time. We are both from NY and intend to stay here for the long-term.

If I do re-finance, when is the soonest I can do it? Also, what is the deal with capitalization of the interest on my loans? Should I pay off the interest before I graduate at the very least? Any other obvious basic advice you'd recommend to me as a financial illiterate?

Thanks.


1. Likely the most financially optimal plan would be to refinance them to a low rate and a long term (e.g., ~3-4% at 10-15 years) because you can likely beat that 3-4% through investing over that period.

2. That said, it's a small-ish amount and some people might prefer it just being gone (personally, I would). If that's the case, then pay aggressively. If you pay aggressively, it may not be worth the hassle of refinancing. Refinancing would still save you money, but because you can wipe out the debt in under a year you would likely be saving less than $1000.

3. Don't burn your cash reserves just to pay it down now. Keep at least an emergency fund at all times (3ish months of expenses).

4. You only have to "live frugally" for less than a year. I put that it quotes because you'd be living off 50k-ish after taxes (it'll cost you about 50k to pay down the debt within a year), and that's not even counting your GF's income or that you're only paying 750 in "rent."

5. You can refinance whenever a lender is willing to approve you. They probably won't do it until you actually have income. Note that once you refi, you will have to start paying 30 days later.

6. Generally entering repayment will capitalize the unpaid interest. No it isn't really worth it to pay it off before you graduate because the capitalized interest won't start accruing its own interest until it actually capitalizes (thus it's practically irrelevant whether you pay off the unpaid interest or make the same payment to principal) and it also isn't going to generate that much interest on its own.

7. Read the basics from r/personalfinance to get a good foundation for personal finance literacy.

8. Relationship advice: no matter how solid the relationship, don't treat the equity in your SO's property as shared. It's hers until/unless you actually marry/commingle your assets.

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Re: Student loan payments: Actual numbers

Postby Anonymous User » Tue Nov 29, 2016 12:41 am

bk1 wrote:
Anonymous User wrote:What I am curious about is mainly whether it's best for our situation if I pay my loans super aggressively, super passively, or somewhere in between? I assume refinancing makes sense? Even if one of us lost his or her job, we could still afford to live/make loan repayments for a while. If paying super aggressively is the best strategy, should I/we start now if it's possible? I have some money in the bank from my 2L summer and between that and my gf's salary we could begin paying down the debt or at least the interest today if we wanted. At the same time, given that we like to have disposable income, might it be best to just pay whatever the minimum is knowing that we will pay a bunch of extra interest over the life of the loan but don't have to live exceptionally frugally for a year or two? The ultimate goal is to own a house or a multi-bedroom apt. somewhere in NYC metro, if it is ever possible. We know it could realistically take a very long time. We are both from NY and intend to stay here for the long-term.

If I do re-finance, when is the soonest I can do it? Also, what is the deal with capitalization of the interest on my loans? Should I pay off the interest before I graduate at the very least? Any other obvious basic advice you'd recommend to me as a financial illiterate?

Thanks.


1. Likely the most financially optimal plan would be to refinance them to a low rate and a long term (e.g., ~3-4% at 10-15 years) because you can likely beat that 3-4% through investing over that period.

2. That said, it's a small-ish amount and some people might prefer it just being gone (personally, I would). If that's the case, then pay aggressively. If you pay aggressively, it may not be worth the hassle of refinancing. Refinancing would still save you money, but because you can wipe out the debt in under a year you would likely be saving less than $1000.

3. Don't burn your cash reserves just to pay it down now. Keep at least an emergency fund at all times (3ish months of expenses).

4. You only have to "live frugally" for less than a year. I put that it quotes because you'd be living off 50k-ish after taxes (it'll cost you about 50k to pay down the debt within a year), and that's not even counting your GF's income or that you're only paying 750 in "rent."

5. You can refinance whenever a lender is willing to approve you. They probably won't do it until you actually have income. Note that once you refi, you will have to start paying 30 days later.

6. Generally entering repayment will capitalize the unpaid interest. No it isn't really worth it to pay it off before you graduate because the capitalized interest won't start accruing its own interest until it actually capitalizes (thus it's practically irrelevant whether you pay off the unpaid interest or make the same payment to principal) and it also isn't going to generate that much interest on its own.

7. Read the basics from r/personalfinance to get a good foundation for personal finance literacy.

8. Relationship advice: no matter how solid the relationship, don't treat the equity in your SO's property as shared. It's hers until/unless you actually marry/commingle your assets.


I'm quoted anon.

Thank you, this was helpful. I didn't know what r/personalfinance was but am I right from googling that it refers to a Reddit forum?

And I take your point as to # 8--but I do have to at least assume that her property will eventually be shared or else my analysis and subsequent life actions would be very different (that is I'd be planning towards saving for my own property purchase one day, rather than mindlessly contributing to "hers").

EDIT: Also, I improperly phrased the capitalization question. I meant, should I pay off the interest prior to the deferment period ending. Seems like your implied answer to that is yes?

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Re: Student loan payments: Actual numbers

Postby bk1 » Tue Nov 29, 2016 3:39 am

Anonymous User wrote:I'm quoted anon.

Thank you, this was helpful. I didn't know what r/personalfinance was but am I right from googling that it refers to a Reddit forum?

And I take your point as to # 8--but I do have to at least assume that her property will eventually be shared or else my analysis and subsequent life actions would be very different (that is I'd be planning towards saving for my own property purchase one day, rather than mindlessly contributing to "hers").

EDIT: Also, I improperly phrased the capitalization question. I meant, should I pay off the interest prior to the deferment period ending. Seems like your implied answer to that is yes?

No problem. Yea I mean this: https://www.reddit.com/r/personalfinance/wiki/index (read the basic advice link at the top and then go from there).

That's fine to plan that way. I meant it in the sense that if you do break up, don't expect that you will get anything for that money.

Why do you think you should pay off the unpaid accrued interest before deferment ends? That interest capitalizes once deferment ends (and repayment begins). But it doesn't make sense to prioritize paying off that interest early. For example, let's say you want to make a payment before deferment ends. Assuming you can allocate that $ to either principal or unpaid interest (I'm not 100% sure you can do this with fed student loans, you may be required to pay off interest first), you should prioritize principal if it's possible. Why? Because the principal is always accruing interest whereas the unpaid interest won't accrue interest until it capitalizes (which is in the future if you're talking about making a payment before deferment ends). If you paid the unpaid interest instead, you would be losing out on the interest savings you would have had had you paid principal instead.

In addition, I don't think the interest capitalizing is a significant enough even to warrant making a payment before deferment ends that you otherwise would not have made. Your unpaid interest is probably around let's say 5k. If you were to pay it off in a lump sum before it capitalizes, it would cost you 5k. If you were to pay it off over the course of 12 months after it capitalizes, it would cost you around 5165. If you were to pay it off in a lump sum a year after it capitalizes, it would cost you around 5300. The difference is relatively minimal imo.

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Re: Student loan payments: Actual numbers

Postby Philafaler » Tue Nov 29, 2016 11:07 am

Nebby wrote:Another question that I've been pondering:

My LRAP sends me two checks worth 6 months of loan payments each. one check in December and one in May. Since my 2017 PAYE plan is $0 a month, should I take my December check (which is $17k) and pay it all towards my loans, since I won't be required to pay anything else under PAYE? Or should I just make the standard repayment that my LRAP will cover (~2k/month)? I feel like the former option will make a bigger dent in the long haul, but at the same time I don't know how much it honestly matters since I'm planning on remaining on PAYE/PSLF/LRAP for the next 10 years


If you're allowed to, you should keep the cash and save it. Idk whether that violates the terms of your LRAP--so look into that--but there's no reason to give cash to the gov't when it will forgive the debt at the end of ten years.

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Re: Student loan payments: Actual numbers

Postby Nebby » Tue Nov 29, 2016 11:20 am

Philafaler wrote:
Nebby wrote:Another question that I've been pondering:

My LRAP sends me two checks worth 6 months of loan payments each. one check in December and one in May. Since my 2017 PAYE plan is $0 a month, should I take my December check (which is $17k) and pay it all towards my loans, since I won't be required to pay anything else under PAYE? Or should I just make the standard repayment that my LRAP will cover (~2k/month)? I feel like the former option will make a bigger dent in the long haul, but at the same time I don't know how much it honestly matters since I'm planning on remaining on PAYE/PSLF/LRAP for the next 10 years


If you're allowed to, you should keep the cash and save it. Idk whether that violates the terms of your LRAP--so look into that--but there's no reason to give cash to the gov't when it will forgive the debt at the end of ten years.

You can't keep it--it has to be used to pay down the loan regardless of how much your actual payments are.

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Re: Student loan payments: Actual numbers

Postby Calvin Murphy » Tue Nov 29, 2016 10:39 pm

Nebby wrote:
Philafaler wrote:
Nebby wrote:Another question that I've been pondering:

My LRAP sends me two checks worth 6 months of loan payments each. one check in December and one in May. Since my 2017 PAYE plan is $0 a month, should I take my December check (which is $17k) and pay it all towards my loans, since I won't be required to pay anything else under PAYE? Or should I just make the standard repayment that my LRAP will cover (~2k/month)? I feel like the former option will make a bigger dent in the long haul, but at the same time I don't know how much it honestly matters since I'm planning on remaining on PAYE/PSLF/LRAP for the next 10 years


If you're allowed to, you should keep the cash and save it. Idk whether that violates the terms of your LRAP--so look into that--but there's no reason to give cash to the gov't when it will forgive the debt at the end of ten years.

You can't keep it--it has to be used to pay down the loan regardless of how much your actual payments are.


It sounds, then, like you can't stick it all in an index fund and take out 2k/month to pay loans...given the risk that you could lose money on the investment? If that's the case, then you should probably pay it all at once. You save ~$500 in interest in the unlikely event that you end up paying off your loans. Let's say there is a 2% chance that that happens, that means you saved $10. Alternatively, you could put it in a savings account...let's say you get a whopping 0.1% interest...you're looking at maybe $4 over the course of 6 months.

Then again, maybe there are better savings accounts out there or you think your odds of repayment are higher or lower. Also...some of the scenarios that result in repayment shift the calculus anyway...if you win the lottery and quit your job, $500 in saved interest probably isn't a big deal. If you lose PSLF because of less fortunate circumstances, your student loans probably aren't your first concern.

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Re: Student loan payments: Actual numbers

Postby JenDarby » Tue Nov 29, 2016 10:50 pm

I was going to suggest savings account each time, as it boosts your liquid net worth at any given moment if you needed. Plus you can do better than .1%. I get .75% with capital one 360 and .95% with discover savings. There's no minimum balance requirement with either and usually you can get a decent sign up bonus (at least with discover).

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Mr. Peanutbutter
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Re: Student loan payments: Actual numbers

Postby Mr. Peanutbutter » Tue Nov 29, 2016 11:23 pm

Yeah, Ally is 1% just get a savings account. Doesn't seem right or ethical to invest it

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Re: Student loan payments: Actual numbers

Postby Nebby » Tue Nov 29, 2016 11:35 pm

Mlk&Ckies wrote:Yeah, Ally is 1% just get a savings account. Doesn't seem right or ethical to invest it

Yup right now it's sitting in a dedicated Ally Savings account incurring dat 1%

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Re: Student loan payments: Actual numbers

Postby Anonymous User » Wed Nov 30, 2016 12:49 am

bk1 wrote:
Anonymous User wrote:I'm quoted anon.

Thank you, this was helpful. I didn't know what r/personalfinance was but am I right from googling that it refers to a Reddit forum?

And I take your point as to # 8--but I do have to at least assume that her property will eventually be shared or else my analysis and subsequent life actions would be very different (that is I'd be planning towards saving for my own property purchase one day, rather than mindlessly contributing to "hers").

EDIT: Also, I improperly phrased the capitalization question. I meant, should I pay off the interest prior to the deferment period ending. Seems like your implied answer to that is yes?

No problem. Yea I mean this: https://www.reddit.com/r/personalfinance/wiki/index (read the basic advice link at the top and then go from there).

That's fine to plan that way. I meant it in the sense that if you do break up, don't expect that you will get anything for that money.

Why do you think you should pay off the unpaid accrued interest before deferment ends? That interest capitalizes once deferment ends (and repayment begins). But it doesn't make sense to prioritize paying off that interest early. For example, let's say you want to make a payment before deferment ends. Assuming you can allocate that $ to either principal or unpaid interest (I'm not 100% sure you can do this with fed student loans, you may be required to pay off interest first), you should prioritize principal if it's possible. Why? Because the principal is always accruing interest whereas the unpaid interest won't accrue interest until it capitalizes (which is in the future if you're talking about making a payment before deferment ends). If you paid the unpaid interest instead, you would be losing out on the interest savings you would have had had you paid principal instead.

In addition, I don't think the interest capitalizing is a significant enough even to warrant making a payment before deferment ends that you otherwise would not have made. Your unpaid interest is probably around let's say 5k. If you were to pay it off in a lump sum before it capitalizes, it would cost you 5k. If you were to pay it off over the course of 12 months after it capitalizes, it would cost you around 5165. If you were to pay it off in a lump sum a year after it capitalizes, it would cost you around 5300. The difference is relatively minimal imo.


Ok fair enough. I don't fully understand the first paragraph. It wasn't really a question to me of whether to pay principal instead of interest but rather whether to pay interest or nothing at all. I was just curious if it would save me any material amount to pay off the interest prior to capitalization. The second paragraph seems to answer this though, and assuming that is right, it makes sense. In doing the calcs myself too it seems like the interest compounding doesn't add up to as much as I had originally thought.

Thanks.




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