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The Plan: Targeting High Interest Federal Loans

Michael Lux Blog, Student Loan Plan, Student Loans 0 Comments

In this edition of the Student Loan Plan we take a look at Mandy’s federal repayment issue.  She has some loans where she targets forgiveness, but is worried about this interest rates on others.  If you have a question for the Sherpa, feel free to ask us!

Mandy writes:

My husband and I just finished grad school. Because he is a municipal employee, we are signing him up for PSLF, and decided to go with REPAYE, since he has the much smaller loan balance so the bulk of the payment will go to my loans which aren’t eligible for forgiveness.

However, once per year I get a big bonus, which ideally I would like to apply to my highest balance loans, since I have some stupid crazy ones sitting at nearly 7% interest.

So my question is:

1) Is it possible to direct an extra payment to a specific loan while under REPAYE?
2) Will this affect our repayment strategy in any other way that is non-obvious?

Given our current income (we already have good jobs in our fields) and assuming like 3-4% salary growth over the next 20 years plus when we lose the dependent deduction as our kids age out, if we pay no additional amounts my husband will get 23,000 forgiven, but we will end up paying almost 70k in interest on mine and I will get nothing forgiven (it will repay in 18 years).

If we can apply my bonuses to my highest interest loans, based on my understanding of the proportionality rule (although this could be off if they don’t figure out the proportions monthly,) this will work out to a much happier 18,000 forgiveness plus 50k of paid interest.

Thanks for your help! I did try to search the forums for an answer to this, but I couldn’t seem to find one specific to one borrower on PLSF the other not, under REPAYE, married filing jointly, and wanting to do extra payments specifically applied.

I called my servicer, but they basically were like “what?”

The Plan

To answer your first question, the answer is yes, it is possible to direct extra payment to the loan of your choice.  In fact, this is a very smart approach for the reasons that you outlined.

You have already seen the hard part of this approach: dealing with your loan servicer.  Targeting extra payments towards specific loans is something that numerous borrowers have struggled with.  Dealing with an error is even more difficult to fix.

This is a process that should be simple, but the sad reality is that it is not.  My advice would be to talk call your servicer again and simply explain that you want to make an extra payment towards a specific loan.  Ask them what the best way of doing it is.  If it doesn’t seem like the person you are talking to understands what you want or is capable of doing it, don’t be afraid to end the call and try later.  Some customer service reps are better than others.  Dealing with this issue requires a good one or you could end up with a mess on your hands.

I’ve also noticed that my servicer (myfedloan) has an option on their website to specify what loans you want your extra payment to be applied to.  If your servicer has this option, it could be the best route.

As far as possible consequences to this plan, one thought is that the minimum payments on your husbands loan will go up slightly.  As you noted, your balance is higher so more of the REPAYE payment goes towards your loans.  As your balance drops relative to your husbands, the percentage of REPAYE that goes towards your loan will also drop.  Larger payments to his loans mean less to forgive at Public Service Loan Forgiveness time.

Finally, I will also say that the plan you have outlined is clearly well thought out and I applaud you for doing your research AND running the numbers.  My final thought would be to caution you against spending a fortune in interest to get a little bit of forgiveness.  Take a look at what the numbers would be if you aggressively tried to pay off your debt.  (Keep in mind that the refinancing option, despite its risks, could lower your interest rate so that you can pay things off even faster).  If your finances allow it, an aggressive repayment may end up saving more in interest than the amount forgiven after the ten years.