Mailbag: Dealing with Undergrad loans while in Grad School

Michael Lux Blog, Consolidation, Lower Payments, Mailbag, Student Loans 1 Comment

Earlier this week, I received the following email from a reader:

I have three unsubsidized undergraduate college loans from Sallie Mae (now Navient bc they split the company). These are private loans. The outstanding balance, combined, is about 87,000 dollars (I have been repaying them since 2007). There is a loan for about 31,000 dollars at 9.75 %, one for 26,700 at 9.75%, and one for 29,300 at 8.25%.

For the past two and half years, my loans have been in automatic deferment because I have been taking graduate courses, but I still pay them every single month. The monthly bill if I pay all the minimums is about 1200—I usually pay a little more—closer to 1300.

I am flirting with a few options here—consolidating them to try and get one fixed, lower interest rate, or snowballing the 26,700 dollar loan at 1300 a month bc I do not have to currently make minimum payments on the other two loans. I doubt I will be able to get any relief on these rates from Sallie Mae/Navient themselves. Thoughts?

Many people end up dealing with high balance, high interest rate loans, but very few have the foresight to address these loans while still in school.  Being in school while you are trying to address your student loans has some major advantages and disadvantages.

Doing a quick bit of math, I see that each year you are paying over $8,000 per year in interest alone.  Put another way, that amounts to $670 per month or $22 per day.  No matter how you look at it, that is a staggering amount of money to be paying in interest.  The good news is that by paying extra each month, you are knocking down the principal at a faster rate, and with each large payment, your interest spending drops slightly.  However, in this situation, there are a number of ways to greatly reduce this debt.

The Best Case Scenario

The best case scenario is to reduce the interest rate.  By refinancing the loan at a more reasonable 4 to 5%, you could save hundreds of dollars each month.  There are two ways in which you can go about lowering your interest rate.

The first route would be to get your lender to willingly lower the rate.  The problem is that your lender has no incentive to reduce your interest rate.  As noted earlier, they are generating a great income from the monthly interest, and you are contractually obligated to pay it off.  Even in cases of extreme financial hardship, private lenders are very hesitant to modify interest rates.

As you stated in your question, the other option would be to consolidate your loans.  Looking to our list of student loan consolidation interest rates, there are a number of companies that are offering far superior interest rates.  If you are still in school or still taking out student loans, it may be more difficult to secure private student loan consolidation.  These companies are notoriously stingy, and reluctant to consolidate for people with a negative credit history or relatively low income compared to their total debt.  However, if you can get qualified for a loan and lock in a lower rate, your savings over the life of the loan would be huge.  If your present finances prevent you from consolidating your loans, you can proceed to Plan B until they change.

Plan B: Attack!

Because you are still in school the minimum payment on your loans will probably remain at $0 per month (note: some private loans will require payments during graduate school).  Obviously, by making payments, you prevent your debt from further ballooning into an even worse solution.  Typically we recommend paying the minimum on each loan and then paying everything you can spare towards one loan.  Usually, this should be your highest interest rate loan.  Because different loans have different interest rates, paying off the high interest rate loan first can result in a huge savings.

In this case the interest rates are all within 1.5% of each other.  However, even with the interest rates being so close, getting one loan entirely eliminated has its advantages, not to mention the fact that there will still be some savings if you pay off the highest rate one first.  In fact, it could be worth hundreds of dollars each year.

Therefore, it probably makes the most sense to knock out one of the high interest rate loans first and then move on to the other loans.  Because the minimum each month is $0 on your loans, you will see one loan drop quickly while the balances on the others grow.  You may want to consider paying just the interest on two of the loans and then using all of the remaining money to reduce the balance of the highest interest rate loan.  It is a question of personal preferences and self motivation.  The most important part is that you stay motivated and aggressively attack your debt.

Being able to pay off one of the loans is a huge milestone and a major confidence booster.  It also can help your personal finance stats, such as credit score and debt-to-income ratio.  The sooner you can qualify for a lower interest rate loan, the better.

The Bottom Line

This information probably doesn’t come as good news.  There really is no easy way to make 87k in debt disappear.  However, the important thing is that you are staying on top of your debt.  While most grad students just sit back and watch their undergrad debt grow, you are ensuring that the bills you see at graduation are much more reasonable.  The best thing you can do is continue to stay on top of your loans and constantly looking for new ways lower interest rates and reduce the principal balance.

Good Luck!