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Thread: paying off student loans

  1. #1
    God/dess audrey_k's Avatar
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    Default paying off student loans

    So I got my loan package yesterday-- the best option was for me to go with paying off my $35,000 over ten years with $260 monthly payments and $2000 in interest.

    While the plan is totally doable, I guess I'm wondering if it's a better option for me to focus on just repaying it over the next year-- I've calculated it and if my salary stays the same, if I put 15% of my monthly income towards paying off my loans I could be done in a year.

    I don't like the idea of owing so much money, of having to deal with repaying it over such a long period of time-- I want it to be over with, I want to go to grad school in two years with a fresh start. I don't want the fact that I owe this much money to hurt my credit or my chances of being able to buy a house/apartment sometime in the next ten years. And I like the idea of putting my income towards something meaningful, like paying off my loans-- I've gotten a lot better at saving, I was SHIT at it when I first started dancing, but I'm getting better now. I'm just not one of those people who does well with "just save everything" I really have to have like, super specific goals in mind.

    But I don't know if it's actually better for me to just pay the loans off in the ten year plan?

    On a lighter note, my father is very concerned about me being able to pay off my loans-- he is very surprised I'm not asking for payments to be deferred for six months, and thinks that a $260 monthly payment seems very high. My parents are seriously so clueless when it comes to my life!

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    God/dess lynn2009's Avatar
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    Default Re: paying off student loans

    You could go w/ the ten year plan and still pay off the principal en masse early on if you wanted to. 260 would just be your minimum payment.
    "There are different kinds of darkness. There is darkness that frightens, the darkness that soothes, the darkness that is restful. There is the darkness of lovers, and the darkness of assassins. It becomes what the bearer wishes it to be, needs it to be. It is not wholly bad or good."
    - The Court of Mist and Fury

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    Default Re: paying off student loans

    ^principal en masse?

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    God/dess lynn2009's Avatar
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    Default Re: paying off student loans

    En masse or a lot...maybe I didn't use the phrase correctly. You don't have to stick to the 10 year plan, you can always pay extra to reduce the principal & still be debt free in a year.
    "There are different kinds of darkness. There is darkness that frightens, the darkness that soothes, the darkness that is restful. There is the darkness of lovers, and the darkness of assassins. It becomes what the bearer wishes it to be, needs it to be. It is not wholly bad or good."
    - The Court of Mist and Fury

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    Default Re: paying off student loans

    Expansion/clarification on what Lynn is saying. You can take the ten year plan as it is and still pay it down much faster than that. The ten year plan assumes you only ever pay $260 per month. A portion of that goes to paying down the principle (original loan amount, or 35k for you) and a portion goes to the interest (2k, for you) each month. Every dollar you pay beyond $260 each month (and you can pay as much as you want at a time) goes directly towards principle (not interest). So, if you managed to pay it down in one year, then you'd save on the nine years of interest payments by never having to make them. You don't lose keeping your current plan and you keep padding if you ever need extra money (i.e. don't wanna pay $3500 this month for the loans? Pay the $260 or whatever and keep the extra). Did that make more sense?


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    Default Re: paying off student loans

    I think you're asking about prepayment, so this article should help.

    TLDR: pay more than the minimum so less interest will become part of the principal over the life of the loan.
    Last edited by dpacrkk; 07-27-2014 at 10:18 PM. Reason: auto correct fail

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    Default Re: paying off student loans

    Audrey, there are lots of 'new' options available regarding repayment of student loans thanks to recent 'executive action'. A key factor in choosing from the available options is whether or not you plan to leave the UK and return to living in the USA within the next 20 years. Another key factor is how much US based income you expect to be reporting in future years.

    also, for strategic purposes, student loans usually carry a variable interest rate. The $260 per month payment quoted is true at the moment, but could change significantly if and when the US gov't resets future interest rates. Also, based on simple math that $35,000 / 120 months = $291 with zero interest, it appears that the $260 per month payment being quoted is part of some 'graduated payment' loan amortization scheme that allows for negative amortization low payments during early years that gradually rise through the life of the loan. The payment for full amortization of interest charges has to be in the >$400 per month ballpark given that 5% annual interest = .05 * $35k / 12 months = $146 interest + $291 principal = $ 437 monthly payment. Obviously, if future gov't set interest rates jump from 5% to 7%, the monthly interest charge would increase by another ~$60 !

    Logically speaking, there now appear to be two approaches to achieve minimum total 'cost' of US student loans. The first is to pay them off ASAP to avoid interest charges. The other is to repay them as SLOWLY as possible, taking advantage of deferments, taking advantage of capped monthly payments at 10% of REPORTED income levels etc. ... such that at the end of 20 years the remaining outstanding loan balance will be 'forgiven'. Obviously, the latter option becomes more attractive if you also plan to 'rack up' an additional $35k+ in US student loan debt by pursuing a Masters degree.

    I would also add that since FAFSA and the IRS share data, it's rather likely that if you pursue soonest possible repayments, your 'massive' student loan payments may attract IRS attention questioning where you're getting the 'massive' income to make such repayments possible ... and whether appropriate US income taxes have been paid on that 'massive' income.
    Last edited by Melonie; 07-28-2014 at 03:54 AM.

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    Default Re: paying off student loans

    Quote Originally Posted by Melonie View Post
    The other is to repay them as SLOWLY as possible, taking advantage of deferments, taking advantage of capped monthly payments at 10% of REPORTED income levels etc. ... such that at the end of 20 years the remaining outstanding loan balance will be 'forgiven'. Obviously, the latter option becomes more attractive if you also plan to 'rack up' an additional $35k+ in US student loan debt by pursuing a Masters degree.
    This is what I was getting at in my post, but of course you said it much better than me Melonie! I've seen few posts from you on here saying that student loans may end up being 'forgiven' as the amount of debt has reached insane levels, but I'm not sure if it will apply to me in this case since I don't have the 20 year plan? Even though $35,000 is the minimum amount that you can owe and still apply for the 20 year option, I apparently don't owe enough in the right kind of loans for it to apply to me.

    I'm also wondering if, monthly payments on time for ten years will bump up my credit more than just paying them off in 1 or even 2 years?

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    Default Re: paying off student loans

    ^^^ if you're considering pursuing a Master's degree, for sure you can increase your gov't backed student loan level beyond the $35k threshold for 20 year 'forgiveness'.

    As to credit rating, late payments vs on time payments vs early payments on student loans have the exact same effect as if the loan were for a car or a house. Late payments hurt significantly, on time payments help, and early payments have mixed results.

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    Default Re: paying off student loans

    If you get the ten year agreement, is there a penalty for prepaying the loan? If you could keep the scheduled payments manageable that would allow you to make additional payments when funds are available, and still have no problems with the low payments when business is slow.
    Last edited by slowpoke; 07-29-2014 at 04:35 PM.

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    Default Re: paying off student loans

    As is also the case with car loans and mortgage loans, making additional payments can be considered a 'bad' thing by lenders because it deprives the lender of expected 'earnings' i.e. interest charges. Similarly, making additional payments does NOT compensate for future payments being due on a particular future date - in other words if you make an additional early payment but as a result fail to make a required monthly payment, even though in your own mind you are 'ahead' on overall loan payments, in the mind of lenders you are 'late' that month ( with associated late payment report to credit reporting agencies ).

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    Default Re: paying off student loans

    There's no prepayment penalty for educational loans. And having a longer period of on time payments is more beneficial to your credit history than a lower balance (for educational loans though, not revolving credit).

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    Default Re: paying off student loans

    ^^^ true that, unlike certain mortgage and auto loans, the gov't will not tack on additional 'early repayment' charges to student loans. However, the future effect upon different potential lenders stemming from a history of early loan repayment can be 'mixed'.

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    Default Re: paying off student loans

    Also, keep in mind that having very old student loans (somewhat and sometimes) helps your credit score. Old credit that is regularly paid on time is the best. When I started grad school, I had the opportunity to pay off the last 1K of my debt from undergrad but I chose to put that money towards grad school instead. Paying off that last 1K at a glacial speed has boosted my credit score like you wouldn't believe. My boyfriend is older, earns more, has more money in the bank, never had a late credit card payment but only has medium credit score because he's never had any debt. It's crazy how much your debt can work for or against you.

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    Default Re: paying off student loans

    I have been trying to track down the actual details for recently introduced FAFSA student loan 'forgiveness' programs. From various sources, it appears that student loan 'forgiveness' eligibility boils down to a handful of different situations ...

    - The basic program requires that ANY student loan borrower make 20 years worth or 240 regular monthly payments toward their student loans. After the 240th payment is made, any remaining outstanding balance will be 'forgiven'.

    - An accelerated program requires that student loan borrowers working in 'Public Service Related' fields make 10 years or 120 regular monthly payments toward their student loans. After the 120th payment is made, any remaining outstanding balance is 'forgiven'. Qualifying job types are gov't employee, teacher, military, emergency medical services, non-profit corporations, etc. Qualifying payments only count payments made after Oct 1 2007.

    - A program tailored to 'low income' student loan borrowers is the 'Income Based' repayment plan. It involves two aspects. The first is that monthly student loan payment amounts are reduced ( a.k.a. capped ) to 10% of the borrower's 'discretionary' income. While details are sparse, this would appear to equal 10% of the amount of after-tax income still remaining after 'necessities' such as rent, food, utilities etc. are subtracted ... thus may actually be 5% or less of pre-tax income ( and in some cases, actually ZERO ). The second is that, after 25 years worth or 300 'reduced' monthly payments are made, any remaining outstanding balance will be 'forgiven'.

    Note that all three of the above plans are based on the number of actual student loan payments which were / are made ... as opposed to a time based threshold. Thus if you defer, 'miss' or are 'short' on monthly payments, these months will not count toward the student loan forgiveness programs' total number of payments requirement.

    - there are also 'targeted' student loan forgiveness programs involving the 'Nurse Corps', the 'National Health Service Corps', etc. These programs aren't actually loan forgiveness based, but instead make direct third party payments against student loan balances after a 2 or 3 year commitment to work under the targeted programs is completed. The 'good' side is that these programs result in significant student loan balance reductions very quickly i.e. 60% of outstanding balance under the 'Nurse Corps' or $30k-$50k under the 'National Health Service Corps', after two years of work. The 'bad' side is that these programs target working environments which health care professionals typically avoid ... like inner city hospitals, Native American reservations, 'middle of nowhere' clinics, etc.

    On a totally different 'tack', there is also the potential to have outstanding student loan debt 'discharged' as part of a bankruptcy filing on grounds of 'Hardship'. Admittedly, this requires the bankruptcy filer to prove that a number of situations exist ... paraphrased from

    A. a 'minimal' standard of living cannot be presently maintained by the borrower ( and borrower's dependents ) if student loan payments must still be made, plus
    B. the state of affairs is such that said 'minimal' standard of living cannot be achieved for a substantial period of time if student loan payments must still be made, plus
    C. the student loan borrower has previously made 'good faith' efforts to try and repay student loan obligations

    Obviously, the different options above are of value to different people in different situations. The 'Hardship' discharge via bankruptcy is most feasible for single mothers. The '10 year' program is most feasible for teachers, social workers, career military, etc. The 25 year program is obviously most feasible for those with advanced degrees ( thus mountainous student loan balances ), but whose majors are in fields which involve comparatively low pay rates.

    Also, as with any major sums of money, the tax consequences of student loans must be considered. Under present US law, the interest portion of monthly student loan payments are deductible against taxable income. Also, under a recently enacted law, the amount of forgiven outstanding student loan balance is now EXEMPT from tax rules which consider the cash value of forgiven debt in general ( i.e. reduced amount 'settlements' with creditors, 'shortfalls' in mortgage recoveries after foreclosure, etc. ) to be additional taxable income for the year during which the debt forgiveness takes place.
    Last edited by Melonie; 09-13-2014 at 06:56 AM.

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