Student Loan Payoff Strategies

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Student Loan Payoff Strategies

Post by brookline » Wed May 09, 2018 4:31 pm

I'm seeking out of the box thinking on how to pay off student loans at the fastest possible rate. I have $22,000 in US Dept. of Education Direct Loans (6% fixed rate) that I'm paying off through MOHELA. I'm not thinking of stuff like getting a side job. Rather, is there an advantage to refinancing with a private lender? Or will I pay down principal faster if I make payments twice a month? Or make an extra payment on the day after the scheduled loan payment is due so as to dig deeper into principal?

Mister Imperceptible
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Re: Student Loan Payoff Strategies

Post by Mister Imperceptible » Fri May 11, 2018 7:16 am

As soon as you get paid, the very first thing to do after money goes into your bank account, immediately funnel every cent into the principal that is above and beyond the amount you feel comfortable with to handle bills and emergencies.

I employed this strategy for 5 years and paid off $175,000 in student loans. It isn’t complicated, just hammer away.

You might be able to get a lower rate if you refinance with a private lender but you lose a lot of the potential forgiveness options that go with the public loan.

If you aren’t waiting to be forgiven, look to refinance and just hammer away. The faster you pay, the more your efforts snowball.

Scott 2
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Re: Student Loan Payoff Strategies

Post by Scott 2 » Fri May 11, 2018 5:53 pm

The payoff strategy depends on your other debts, investment opportunities, tax situation, etc.

My loans were the most expensive debt I had, so I figured out the most I could afford to put towards them each month, then set my recurring payment to match. Money beyond the minimum payment would go to principal. I suppose I could have optimized that further by scheduling two payments a month, one after each pay period. Paying the debt first worked better for me than waiting to see what extra I had at the end of the month.

I did not have any investment opportunities that would offer a greater return than paying off my loans. I'm guessing you are in a similar position.

When servicing debt, part of evaluating how expensive it is, is understanding if the interest you are paying impacts your income taxes. Using a mortgage as an example, if you itemize on your income taxes and are in a 28% marginal tax bracket, a 4% interest rate becomes more like 3%. It's been a long time since I looked at the tax implications for student loans, not sure if they are deductible. I will note, in my personal example of a mortgage, it turned out the standard deduction was a better deal than itemizing. So I would have treated my mortgage rate as 4% anyways.

At a very simplified level, the difference between evaluating debt vs. an investment is a minus sign in front of the dollar amount. Once you get the math worked out, you can look at the options and figure out what's the best place to put the money. There are various ways to evaluate how expensive a debt is, or how valuable an investment is. It's worth getting comfortable with some of those for your financial planning.

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Re: Student Loan Payoff Strategies

Post by DutchGirl » Fri May 11, 2018 11:54 pm

1. Pay down a loan as soon as you can - so as soon as a paycheck hits your account, funnel money towards the loans
2. Focus on the loan with the highest interest rate
3. Try to reduce payments to loans with lower interest rates - so if there is a payment plan with a lowerminimum payment than what you have now, use that, but then of course use all extra money you have to pay down the loan with the highest interest rate
4. If refinancing significantly lowers your interest rate, then it's worth your trouble.
5. Understand the conditions of your loans and the quirks of your loan provider - for example fully understand how and when to pay, how to make extra payments towards the principal (and not towards future payments, because that kind of defeats your purpose), how to possibly reduce the interest rate, possible fees that you may want to avoid, etc.
6. There was a deduction for student loan interest in the US tax system, but I'm not sure whether it's still there in 2018. You might want to look into that. Probably the difference will "only" be a few hundred of dollars at most. But of course, it's worth an hour or two of your time to research this.

Some other things to remember:
1. If your job offers a 401k with immediate matching, then put in enough to get the match. Say the match is 25% of what you put in, then that's like earning 25% of interest on that amount for that year - that beats most student loan interest rates.
2. If your remaining student loans have an interest rates lower than roughly 5%, consider paying them down slowly, while investing the rest of your money in investments that likely bring in more than 5% of year of growth. A diversified stock-ETF or index fund will very likely, in the long run, give a higher return than 5%.

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Viktor K
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Re: Student Loan Payoff Strategies

Post by Viktor K » Tue Jun 12, 2018 9:35 am

Another thing to consider is whether you have one loan or several and how much outstanding interest is on each one, and if that interest earns interest. For example, my loan debt is made up of 8 loans. If I pay a lump sum that will get divided to all of them by default and most of that would go to outstanding interest. With some payment plans (like mine), your outstanding interest doesn't actually generate interest itself (it isn't capitalized). Thus, it is more advantageous to pay off the principal. You can do this by directing your lump sum payments towards a single loan rather than dividing it between all of them.

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Re: Student Loan Payoff Strategies

Post by Smashter » Tue Jun 12, 2018 11:20 am

+1 to Mister Imperceptible. At first, I hemmed and hawed and considered a zillion possibilities for reducing my payments. I only made quick progress once I started shoveling as much money as possible at the loan without thinking too much about whether I was going about things in the most efficient way possible. Soon enough, it was eliminated. Good luck!

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