Is there any drawback to choosing 25 year repayment plan even if plan to pay off in < 25 years? Forum

[skri65]

I will be graduating next May with substantial federal debt and am "fortunate" enough to have a biglaw job lined up. Without taking refinancing into account, I will have to decide on a repayment plan.

I am confused as to the drawbacks of the 25 year fixed repayment plan and it seems as though I am missing something. Under the 10 year plan, there is a higher monthly requirement payment. Under the 25 year plan, there is a lower monthly payment required, but I still have the option to pay off my debt at payments as high or higher than would be required under the 10 year plan...and I also would have the added benefit of having a lower payment if I got fired or if for whatever reason money became tight.

With this in mind, I am confused as to why a 10 year plan would ever be more preferable than a 25 year plan? It seems as though it has the same benefits (you can pay off debt vigorously if you want to), but without the drawbacks (if for whatever reason money became tight you could pay a lesser monthly payment).

What am I missing?

[Tiago Splitter]

These days everyone just gets on to IBR or PAYE and pays extra if they want to pay it off faster. There is no reason to take on a 10-year obligation unless you refinance with a private lender for a lower rate.

[AVBucks4239]

I will be graduating next May with substantial federal debt and am "fortunate" enough to have a biglaw job lined up. Without taking refinancing into account, I will have to decide on a repayment plan.

I am confused as to the drawbacks of the 25 year fixed repayment plan and it seems as though I am missing something. Under the 10 year plan, there is a higher monthly requirement payment. Under the 25 year plan, there is a lower monthly payment required, but I still have the option to pay off my debt at payments as high or higher than would be required under the 10 year plan...and I also would have the added benefit of having a lower payment if I got fired or if for whatever reason money became tight.

With this in mind, I am confused as to why a 10 year plan would ever be more preferable than a 25 year plan? It seems as though it has the same benefits (you can pay off debt vigorously if you want to), but without the drawbacks (if for whatever reason money became tight you could pay a lesser monthly payment).

What am I missing?

You're not missing anything. You're applying normal debt logic to abnormal debt (e.g., student loans).

For a normal debt (i.e., a car loan or a mortgage), the shorter the term, the lower the interest rate. This is why if you take out a 15 year mortgage, the interest rate is about 3.5% while a 30 year mortgage is about 4.25%. Thus, if you can comfortably pay the 15 year mortgage, it makes more sense to do the shorter term.

Student loans are different. Your interest rate is what your interest rate is, no matter what the term (i.e., your interest rate is the same whether you pick a 10 or 20 or 25 year term). So it really doesn't matter which term you pick.

Of course, the longer you pay towards a loan, the more interest you pay even if it's the same interest rate. But you seem to have the right idea.

Going a little more nuanced, sign up for PAYE/IBR, sign up for auto-payments (to get the .25% interest rate deduction), auto-pay the minimum amount, and then pay any extra money to your highest interest rate loans. This will save you the most money on interest while providing you with the flexibility that you seem to be seeking with a low fixed payment.