I am a recent law grad and going to be earning a salary around $130k. I also have student loan debt currently around $145k. Lucky me, I can make my payments no problem, student loans should be the least of my concerns. That said, I want to pay my loans off while minimizing my interest expenses. My loans generally include:
$30k Private loan on 15 year term at 4.25% fixed
$60k private loan on 15 year term at 4.75% fixed
$6k in Direct Sub. stafford at 3.4%
$5.5k in Direct Sub. Stafford at 3.86%
$5.5 in Direct Sub. Stafford at 4.66%
$15k in Direct Unsub. Grad. Staffod at 5.31%
$15k in Direct Unsub. Grad Stafford at 6%
$6k in Perkins loan at 5%
I took an initial look at the private market and seem to be getting fixed rates (the way rates are going I am hesitant to go variable) around 3.9% to 4.25ish% for 5 year term and closer to around 4.75% for 7 year (including ACH discounts). I am planning on paying around $35k to $40k a year to repayment. Nevertheless, still a little hesitant to lock in with a 5 year term at this juncture, in case something happens. The 7 year term rates only make sense for a small portion of my loans. I am considering keeping my loans where they are at right now and considering refinance again in a year or so (thinking I may be a candidate for First Republic at that point).
That said, because some of my loans are federal, that means picking a payment plan. Given my situation, I can meet standard plan payment schedule (and probably will pay even more). However, I was considering selecting Graduated Extended as a strategy to save interest. Why? Monthly payments are attributed across all my loans. Any amount I prepay, I am allowed to select which loan principal to apply to (assuming there is no penalties or accrued interest). Obviously, I would want to start with that 6% loan and let those 3.4% loans sit.
Also, given the way interest rates are rising, it is quite possible that Certificate of Deposit (CD) rates may exceed my loan rates (especially that 3.4%) in the near future. If deposit rates ever exceed my loan rates, I want to pay as little as possible on my loan. I could stick any amount I would prepay in a CD. If by the time the CD term expires rates have dropped again, I can pay down/off the loan.
Do my two strategies regarding payment plans and maintaining payment flexibility make sense, or am I missing something?
May 3, 2014
Congrats lawgrad… you have definitely done your homework.
Normally I suggest people avoid the graduated extended repayment plan because it isn’t eligible for PSLF or any other loan forgiveness program. However, in you case it sounds like you will be paying the balance off in full, no question… even though it is a large balance.
That being the case, selecting the lowest possible monthly payment and aggressively paying off the higher interest loans makes a lot of sense.
Your interest rates are also quite good, which means there may not be much of a benefit to refinancing. I’d suggest tracking the rates in a few different categories as the student loan interest rates tend to be impacted more by lender funding availability than they do the fed. This page ranks the lenders according to who has the best rates for a number of different loan types
The only other thing that comes to mind is that we can’t just look at your student loan situation in a vacuum. With your lower rate loans, it might be financially advisable to make sure you are putting money away for retirement. Last year we wrote an article on building wealth and fighting student loan debt at the same time. Aggressive repayment is ideal, but don’t skip out on employer matching or other favorable retirement savings options.
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