In this edition of the student loan plan, we take a look at Lindsey’s private student loan dilemma. On the student loan forums she shared that she has one loan with an interest rate above 10%. If you want tips for dealing with your student loans, contact us.
I have a $17,000 student loan with a fixed interest rate of 10.375%. When I spoke to someone from Sallie Mae, rather briefly and with very little assistance, I was merely told I had to pay the interest first. The estimated 196 month repayment total is $41, 769.15.
First, this is terrifying. Second, it is criminal.
A total necessity, regardless.
Is repaying a student loan like paying my car loan? I make my monthly payment of $210 but I add an additional $100, which goes straight to the principal, shaving a little extra off every time. Am I stuck with a $42, 000 dollar loan to pay off or is that just an estimate if it takes me the full 196 months?
Lindsey has already identified the major issue. Having an interest rate above 10% means she will be paying more than double the original loan balance before her debt is gone.
Treating it like a car loan is an excellent approach and may be the best one for Lindsey’s situation. With a 196 month repayment, the early payments will almost entirely be going towards interest. Adding an extra $100 each month will go straight towards the principal and it will definitely get the loan paid off faster and with far less spent on interest. (Side note: if you do pay extra be sure to give your lender specific instructions that the extra payment is to be applied to principal rather than future payments).
The sooner that loan is paid off the sooner the 10% interest rate is history.
An Alternate Route
Another way to get rid of the 10% interest rate, and Sallie Mae, would be to refinance the loan with another lender. The advantage to going this route is that your interest rate could be dramatically lowered. Lower interest rate means a higher portion of your monthly payment will be applied towards your principal balance.
Unfortunately, this route only works if you have a good credit score and income. The companies offering refinancing services focus on the borrowers who will be low risk. When Lindsey took out her loan originally, Sallie Mae knew it was a necessity for her and they were able to charge a higher interest rate. If Lindsey shops around she can take advantage of market competition as well as the low interest rates in the current economy.
A Final Option
If your credit score or income isn’t enough to get a lower rate with another lender, you may be able to convince Sallie Mae to lower your rates.
For borrowers who are struggling to repay their loan, Sallie Mae offers a Rate Reduction Program. The program is set up to help borrowers stay current on their loans who otherwise wouldn’t be able to make payments. The big perk to this program is that Sallie Mae will lower your interest rate to 3% or less for a year at a time, but it can be renewed each year.
If you find yourself in a similar situation to Lindsey, it is important to recognize your enemy. It is not the monthly payment. The real enemy is the ridiculously high interest rate. Use whatever tools you have at your disposal to either lower the rate or pay the loan off as aggressively as possible. Best of all, try to get a lower rate AND pay it off as fast as possible.