What're the smartest ways I can handle my student loans?
May 22, 2015 4:31 PM   Subscribe

I just got my MFA! Hooray! I just saw my student loans! Oh no! Here's the skinny: I owe about $117,000 with an average interest rate of 6.5%. But! I got a great job that pays about $85k, so we'll call it even on the risk/reward front. What're the best policies for paying back student loans? Are there tips and tricks? Things I should be doing now as opposed to later? What's the deal with refinancing? Is there such a thing as private financing (i.e., you agree to pay all my loans and then I pay you at like 3%?) for student loans? This whole field is kind of a mystery and while I intend to pay my loans in full, I want to make sure I'm being as smart about it as possible. Given my salary and average living cost, I can afford to put in about 40k a year.
posted by anonymous to Work & Money (13 answers total) 16 users marked this as a favorite
The main downside to refinancing is that it goes from being federal loans that you can defer if you're broke or a full-time student, to being debt that doesn't have those repayment pause options. For people such as you (and me) who have stable income and no back to school plans, it's a great idea.
posted by aimedwander at 4:51 PM on May 22, 2015 [1 favorite]

Yes, some private lenders will refinance private and federal student loans, potentially at a lower rate depending on your credit rating and income. There's a lot of information on this if you Google, but I went with Citizens recently. I also thought SoFi looked good.

The big thing is that you lose some flexibility like income based repayment and forbearance a or loan forgiveness if you have a qualifying job. Depending on your situation that may or may not be worth a couple percentage points.
posted by J. Wilson at 4:52 PM on May 22, 2015

First up, call your student loan servicing company and find out your options from them. They will have good information on what your particular loans have available to them. They probably have different plans for repayment, slight interest rate reductions if you autopay, etc. You can also consolidate them all into two loans (one subsidized, one unsubsidized).

With that kind of balance, I wouldn't try for a refinance yet. Refinance is now available and it is based on your credit rating. The program is called the Education Refinance Loan and currently Citizen's Bank does them. While you might qualify for an interest reduction, don't do it yet because the student loan as a category has a lot of protections if you lose your job (get sick, join the military, whatever) and need to defer repayment for a period of time. Both deferments and forbearances are available to a regular student loan (and basically depending on the loan origination, it can be up to three years of deferment/forbearance) -- with the refi, only 12 months of forbearance is available. The difference between the two is that deferment also stops your interest from accruing on your subsidized loans while you're not paying, which forbearance does not. You might not think you'll need it, but it's so handy if the unexpected happens.

Student loans are rarely dischargeable in a bankruptcy, and I believe that's also true for the refi loans. So keep that in mind as you move forward.

So talk to your loan provider, get the skinny from them, and then just power up on payments. If you're in a position to pay extra now, do it. Have them get "paid ahead" in case you need breathing room in the future. When a payment is applied, it automatically satisfies any accrued interest first, and then the rest is applied to the principal balance. You can also have it trigger the payment counter so in effect you could be paid ahead for a few months.
posted by clone boulevard at 4:54 PM on May 22, 2015

Consider geting a line of credit from your bank. The interest rate will be much lower. Take money out of the line of credit and pay the loans in full. Besides the lower interest rate, that also changes this up so they aren't student loans anymore, which means if the worst happens they can be discharged by bankruptcy. Put every extra penny you can into paying off this line of credit.
posted by If only I had a penguin... at 4:54 PM on May 22, 2015

If you are going to pay 40k a year, I suspect that's way over the minimum. So if you put the extra towards the principle, keep in mind that you're going to pay a lot less in interest anyway -- which makes it less significant, which is something to keep in mind as you decide.
posted by J. Wilson at 5:02 PM on May 22, 2015 [1 favorite]

Pay off as much of the already-accrued interest as you can now, so that it doesn't capitalize once your loans are out of the grace period. That should keep more of your monthly payments going toward the principle itself (instead of toward the new interest accrued on the principle *and* already-accrued interest).

Personally, I also threw as much money as I could toward my loans during the grace period to try and get my monthly payment as low as possible (since the monthly payment amount was calculated at the end of the grace period). I pay more than the minimum anyway, but I thought it couldn't hurt to minimize my monthly liabilities as much as I could in any case. My debt is much smaller than yours, though, so YMMV. That idea might not really make much of a difference in your situation.
posted by rue72 at 5:39 PM on May 22, 2015

I suggest that you consult with a financial planner about how to manage your loans and to learn about tax implications, your credit score and how to protect your long-term financial security.

The U.S. Department of Education offers information about options for repaying student loans, but doesn't appear to offer help with running the numbers that could help you figure out what you may lose out on if you focus the majority of your income on paying student loan debt immediately.
posted by Little Dawn at 5:48 PM on May 22, 2015

With an interest rate of 6.5%, it makes sense to put as much money as you can bear to muster towards the repayment right now, because that will pay off big time in saving you from paying interest in the future.

My student loan servicer did have some extra deals, like giving you a little break for on time payments, so if your loan servicer has those sorts of incentives, obviously take advantage of them.
posted by treehorn+bunny at 6:05 PM on May 22, 2015 [1 favorite]

You should be saving some of that excess money. I started saving at a decent clip with my first job out of college and I'm sitting on a huge pile of money now.
posted by intermod at 8:20 PM on May 22, 2015

Think if it this way: every extra dollar you spend on paying down your loans is a guaranteed 6.5% return (more actually accounting for tax). You're not going to get that kind of risk free return anywhere else.

This means, pay your loans before making any other kind of investment.
posted by banishedimmortal at 9:58 PM on May 22, 2015 [8 favorites]

if you focus the majority of your income on paying student loan debt immediately.

... I meant the majority of your *disposable* income... and that there may be investments that have better long-term returns and tax consequences, including real estate and retirement accounts. The answers here can help you develop questions for a financial planner [U.S. News & World Report], who can explain things like a Roth IRA [Wikipedia], and long-term financial planning.

General information about how to find a financial planner [e.g. WSJ] is available, and in general, it seems helpful to get professional guidance [ABA Journal] in advance of major financial decisions:
“The greatest asset all young lawyers have is their income. Without it, they lose the ability to compound savings into wealth.”

Luckily for new associates, Haunty believes the first year of employment is actually the best time to start developing good spending, saving, investing and debt reduction habits. [...] While associates’ budgets will vary, Haunty says every plan to pay down debt and contribute to savings and retirement accounts should start with a direct-deposit arrangement. Automating savings, he says, will serve as a sort of automatic budget.

First-years should also consider protecting their incomes with private disability insurance, he says, which is cheaper and easier to obtain for young, healthy lawyers. From there, associates should gradually increase their savings, investments and debt reduction contributions each year to correspond with pay raises, he says.
Also, congratulations on your degree and job!
posted by Little Dawn at 7:59 AM on May 23, 2015 [1 favorite]

Congrats! My solution is not likely to suit everyone, but if this was me and I was single with no children, I'd decrease my main living expense by renting a room in someone else's home. This is how I lived through college both times and for several years after. I made hefty extra payments toward my principal. It was a great experience for me. I probably paid about 40-50% of what I would have if I had my own apartment with associated expenses (e.g., utilities, laundry, furniture, kitchenware). But it's not an option that appeals to everyone.
posted by AnOrigamiLife at 12:39 PM on May 23, 2015 [1 favorite]

In my opinion, the smartest thing you can do is pay the fuckers off ASAP. Pay an even $1000 a week and you're done in a little over two years. Don't get wrapped up in playing games with refinancing. Don't bother taking out a line of credit; if you wind up in a bankruptcy hearing a year down the road, the court will find out where the debt originated and may consider it fraud (IANABanker, but I've read that before). This is a stone around your neck and you want it gone as soon as possible.
posted by disconnect at 2:25 PM on May 23, 2015

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