what to do with our extra money
March 18, 2010 12:25 PM   Subscribe

Question on paying off student loans.

My wife has student loans for the same amount as our mortgage. They are all federally subsidized and I am wondering how we should be dealing with both.

We make a decent living and have an emergency fund, no other debts besides the mortgage and the student loans. Currently we are renting the house out, which may answer my question, but are renting another house in a different city. The rent is enough to pay our mortgage and a little left over every month. We have owned the house for about 4 years now.

She is going back to school for a graduate degree, 3 years, and we may be able to put some of her loans in forbearance or deferment. During the next 3 years, her income is going to be low, but if we tighten our belts we can, feasibly, put about $300 a month toward one or the other, or split it between both.

She also have some private school loans, which we are planning on paying off first, unless this is not a good idea.

I would love everyone's opinion on this.

We are talking about 300,000 to pay off both the house and the student loans if we were to pay both off today.

The mortgage rate is about 4.25% and the average of the student loans is about 5.5%. Both interest amounts, of course, are deductible from taxes, but we would be putting the money toward principal and not interest.
posted by TheBones to Work & Money (14 answers total)
 
I can't really answer the rest of your question, but I wanted to pass on that I was able to put ALL of my federal loans into deferment when I went back to school full-time, subsidized and unsubsidized. I'm not 100% sure, but I think that's how it works for everyone. I believe you can also do this for a certain amount of time if you work for the government, but that's hearsay from teacher friends.
posted by ishotjr at 12:41 PM on March 18, 2010


This question has a very simple solution, which is always the same: once you have an emergency fund, money put away in a retirement account, and savings for other purchases that might otherwise be financed (like a car), you pay down the highest-interest-rate loans first before the lower-interest loans.

One issue that is worth thinking about: are you sure you're not going to need to buy a car in the next 6 years?
posted by deanc at 12:55 PM on March 18, 2010


Are the loans subsidized or unsubsidized? If they're the latter, you'll be able to defer payments, but you'll continue to accrue interest on the loans. This is probably something that you want to avoid.
posted by chrisamiller at 1:09 PM on March 18, 2010


If she is in school at least half-time, she'll qualify for an in-school deferment. The registrars should report her status to the national clearinghouse. To be safe, just have them send an enrollment verification to the loan servicer(s) after the census date. No more payments until she's done. (I work in financial aid)
posted by battleshipkropotkin at 1:33 PM on March 18, 2010


This question has a very simple solution, which is always the same: once you have an emergency fund, money put away in a retirement account, and savings for other purchases that might otherwise be financed (like a car), you pay down the highest-interest-rate loans first before the lower-interest loans.

Not entirely correct. If the interest rate on a given debt is greater than that you expect to return on your investments and savings, then pay down that loan first. This is almost certainly the case for retirement funds and financed purchases such as cars.

The point about an emergency fund is valid.
posted by dfriedman at 1:35 PM on March 18, 2010


The mortgage rate is about 4.25% and the average of the student loans is about 5.5%. Both interest amounts, of course, are deductible from taxes, but we would be putting the money toward principal and not interest.

That's true, but what you are really saving from paying down the principal is future interest payments, so you need to take the after-tax effective interest rates into account how much you'll save over time by paying one down or the other.

One positive aspect of paying down principal on the mortgage is that you can get that money back in cash when you sell the house. As long as you don't end up underwater, $3000 extra principal payments per year would mean $3000 per year more in your pocket when you sell. If you're smart you'll just turn around and use that money to pay down your next mortgage or put it in your student loan debt, but having it in cash gives you more flexibility to do what you want with it.
posted by burnmp3s at 1:43 PM on March 18, 2010


Will you both be covered by some kind of (good) health insurance plan while she's in school? I think that would play a role in your deciding allocations to the emergency fund especially. (Also, will either of your parents or families be available as a financial safety net if worse comes to worse?)
posted by anniecat at 1:52 PM on March 18, 2010


You can defer interest free for all the years of grad school? Don't pay that one off.

You have a 4.25% mortgage which ends up costing about 2.8% after taxes? I don't think I would give that one up either, unless it is adjustable. When the economy picks up most people think their will be inflation and higher interest rates. If you have locked in a tidy loan at low rates you will be sitting pretty when that happens.
posted by caddis at 2:25 PM on March 18, 2010


The mortgage is a 2 year adjustable arm, so I am thinking about refinancing to at least a 5 year arm (about 4.75% instead of the 4.25%).

Only about 1/4 of the loans are subsidized.

We will have health insurance through the university so that is taken care of.

Our emergency fund is substantial and I have also been contributing to both a roth IRA and an individual stock market account.

We have 2 cars right now, both are payed off- one is newer and both are in good condition.

She is going for a master's so she will be a graduate student as well as doing her residency in medicine.

My goal here is to get through the next three years without accruing any more debt and being able to pay off some of it. After the 3 years is up, it will be a whole new ball game.
posted by TheBones at 3:00 PM on March 18, 2010


Ditto what battleshipkropotkin said (I also work in finaid) - those federal loans should go into in-school deferment, just check with the lenders to see if they need a form filed.

Are any of the federal loans consolidated? You may be able to lock a lower interest rate on them, if you do.

From an education loan point of view - work on paying off the loans with the highest interest rate first, esp. focusing on any private loans, and esp. if they are variable rate loans.

Will she be taking out any other loans for grad school? Her best bet is to take the Stafford Loans and then a Grad Plus Loan for anything needed beyond that...
posted by dayspteh at 3:33 PM on March 18, 2010


I am a medical resident who is graduating this year.

My recommendation is to start paying ASAP (i.e. after you have maxed both your IRAs) on the highest interest, unsubsidized Stafford loans, and to pay as much as you can handle. The interest rate is significantly higher than the one on your mortgage, and payments are tax deductible on both.

The problem you have is that they have changed the laws so that you cannot go into economic hardship deferment for residency (though I think you should still be able to defer while she is in the master's program). You should really look into this because the answer is important, since if you can go into economic hardship deferment, you have got to apply for it as soon as you get the chance because there is no other option that allows you to defer making payments and the government to pay interest on the subsidized loans.

Your only choices while in residency alone will be making 'income-based payments' or forbearance, but if you forbear on the loans, they just sit there accruing interest on the entire loan which then gets capitalized into the principal. Then you'll pay interest on the interest. This is bad. This increases what you end up paying on the loans in the long run.

The 'income based payments' can be calculated as follows:
You will pay 15% of your income that exceeds 150% of the poverty line.
Example: a medical resident with an average first year stipend of $43,266 would pay $349 per month, based on [$43,266-($10,210x1.5)]*0.15 divided by 12 months.
In the income based repayment program, the government continues to pay the interest on the subsidized loans for the first 3 years.

The only problem is that you say your mortgage rate is adjustable so that could end up screwing you. But the med school loans are also variable rate unless you consolidate them. Are you going to consolidate them? If the rate on your mortgage is going to screw you if you don't pay it off within the time period, that's another consideration.
If you get the 5 year ARM, are you going to sell the place before 5 years is up? That could help avoid the eventuality of getting screwed on the mortgage and I would still say definitely pay the med school loans.

If you have other questions you can MeMail me, since residency is a pretty specific case in terms of graduate loan stuff. My personal goal is to pay off as much as I can during residency while in deferment, because I refuse to pay any more on this loan than is absolutely necessary and I want to get to the good life faster.
posted by treehorn+bunny at 4:54 PM on March 18, 2010


All of the federal loans are consolidated. I haven't looked into locking into a lower rate on them.

I thought you could only defer stafford loans? And deferment means the loan goes into stasis- no interest collecting, correct? If we do qualify, does that mean we can't make payments on the loans while they are in deferment?
posted by TheBones at 4:57 PM on March 18, 2010


You should be able to defer any federal loans - this includes the federal consolidation you have. During the deferment of a subsidized Stafford loan (or Perkins loans), the government pays the interest that accrues. For any unsubsidized federal loans (Stafford), you are responsible for the interest that accrues during the deferment period. If you have unsubsidized loans, any unpaid interest capitalizes when you enter repayment at the end of the deferment. There is no penalty for repaying on federal student loans while in deferment.

Any private loans borrowed are always a different story - the lender the loan was borrowed with is going to be the best source for information on repayment options.

Also - I'm not as familiar with this as I do not work at a school with students going into medical studies - but your wife may qualify to have certain federal loans canceled. You may want to schedule an appointment with the new school's financial aid office to go over what options you all have with repayment while she's in school and what to do when she's graduated. They are always there for things like this!
posted by dayspteh at 8:19 PM on March 18, 2010


And deferment means the loan goes into stasis- no interest collecting, correct?

Emphatically no. Deferrment just means that you don't have to make any monthly payments. There may be specific instances where the amount you owe is locked (maybe subsidized loans??) but in most cases, that interest will keep piling up.
posted by chrisamiller at 10:15 PM on March 18, 2010


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