Student loan advice needed.
April 30, 2007 8:25 AM   Subscribe

Student loan advice needed. Details within.

I'm not too sure what to do with my student loan debt. After going back to school, I now have two loans through the government. One for about 10,000 and another for about 40,000. I'm currently on a deferment making a payment of about 150 dollars, which is easy for me to afford. The problem is that I'm only making about 43,000 dollars a year, so that doesn't leave a lot for this debt. Right now I'm racking up 288 dollars a month in interest.

I spoke with the student loan people and it looks like I'm getting the best interest rate I can get. Soon I'd like to begin to seriously pay off this debt. I think I can afford to pay 300 dollars a month max, but I'm not sure how to apply it. Should I put the 40k loan on deferment/forbearance and try to pay off the 10k loan ASAP? Consolidate the two and see how much it will cost me month? Are there any unorthodox strategies I can try?

Financially, I pay a low rent, make no car payments, and have no other debt (paid off all my other debt - yay!) I have no assets or investments to sell either. I'm feeling pretty stressed about these student loans and feel that I may not be making enough money professionally to begin to pay them off properly. Considering a max of 300 dollars a month, I dont see how I can begin to break into the principle if I'm paying 288 in interest. Any advice would be appreciated. Thanks!
posted by the ghost of Ken Lay to Work & Money (16 answers total) 5 users marked this as a favorite
Is there an interest rate difference between the two loans? If so, the conventional wisdom is to pay off the higher interest rate first, then work your way down other debt by interest rates. There are a thousand books out there for this topic, but i really liked the Neatest Little Guide to Personal Finance and their section on student loans.

It might be worth checking out a student loan repayment calculator like this one and run all the possible scenarios through it. It will generate a detailed payment schedule, so you'll know exactly how much of a difference each method will make.

FWIW, i have a big consolidated loan at a low rate i pay the minimum on, and a smaller private loan with high interest that I throw as much money as possible at. It always reduces my stress levels to see how much i've paid off that little loan every month, and for now i just don't worry about the big one.
posted by ukdanae at 9:00 AM on April 30, 2007

Obviously, one can't give specific advice without knowing the specifics of your loans, but a couple general thoughts:

Be careful about consolidation. If you're not going to be getting a (significantly) lower rate, it's often not worth it -- and the way the student loan market has moved in the past year or so, rates aren't that great for many recent borrowers. What a lot of those consolidation solicitations fail to point out is that they have the bonus effect of removing some of the protections offered by federal loans -- which, depending on the lender, could mean less forgiving or no forbearance options. I'm not saying that consolidation is a bad option, necessarily, but do your homework first. Ask questions.

I don't know that I would try to pay down the larger principal over the smaller -- I'd go for whatever has the higher interest rate. (Of course, if the interest rates are the same, then I'd probably attack the smaller one for peace of mind.)

Honestly, the way to go is to just sit down with a spreadsheet / calculator and figure out the rates at which your loans are racking up interest (and if/how often they recapitalize, if they're still growing.) It's tedious, but it'll allow you to make the most informed (and best) decision.
posted by theoddball at 9:03 AM on April 30, 2007

Response by poster: I'm pretty sure they're both the same rate. I was thinking of going against any consolidation any trying to pay off the 10k one as soon as possible. That will leave me with only the 40k one in a couple of years. Then the monthly payment will be a lot more manageable. I'm not sure what I can do to the 40k loan in the meantime. Perhaps defer it as long as I can. I'm sure I will be penalized with a lot of interest as I pay off the 10k, but at least I'll have manageable monthly payments then.
posted by the ghost of Ken Lay at 9:10 AM on April 30, 2007

I lived pretty comfortably in very expensive San Francisco in a similar situation -- no car, no kids, etc -- on about $25K/yr. It strikes me that if you're really worried about it, you can budget and pay much more than $300/month if you're making $43K.
posted by YoungAmerican at 9:12 AM on April 30, 2007

Can you consider paying more? I don't know the details of your personal budget, but I was paying $300 per month on my student loans when I was making $27,000, and you make a lot more than that.

If you can't manage that, at least consider paying $150 per paycheck (if you get paid every-other week, like most folks). That way you'll be paying an extra month's worth per year. Also, write "apply extra to principal" on your checks each month.

But don't do any of this until you have a few month's worth of living expenses in the bank. Student loans can seem pretty overwhelming, but they're a lot better than the credit card bills you might accumulate if you have a financial crisis and no cash to get you through it.

Also, if the interest rate on your loans is less than 5 percent, you really ought to just make the minimum payment (as psychologically grating as it feels to do so) and put the extra money in a high-interest savings account. HSBC Direct offers greater than 5 percent interest. You'll come out ahead in the long run.
posted by croutonsupafreak at 9:39 AM on April 30, 2007

Wait, you're making 43K/yr? Even if that's gross, you're netting around 28K, or $2,300/mo. You have to be able to live on less than $2,000 a month. Track your expenses and make a budget. I would shoot for something like this, and I'm talking Bay Area here...

Rent: $800
Food: $400
Debt: $400
Other: $400
posted by Ambrosia Voyeur at 9:40 AM on April 30, 2007

Yeah, I agree about the budget. Figure out where your money is going. My first job I was only grossing $25k, I was supporting 2 people rather than 1 and I was still (barely) able to send $300/mo in. (Food for one person doesn't cost $400/mo either.)
posted by DU at 9:58 AM on April 30, 2007

Response by poster: I can prob do 400-500 a month but I am not sure how sustainable that is for the long run. I picked 300 because thats an amount I can guarantee to do. Once this car I own dies I will have to start making car payments on a car to replace it, as I will not be puttign any more money into savings if I am paying out 400-500 in student loans.

That said, I'm probably low-balling this for the sake of financial safety. Even at 400 a month, I'll only be putting roughly 100 toward the principle, which I guess isn't bad. I'm still trying to figure out is getting that 10k loan out of the way and then focusing on the 40k loan is a better bet.
posted by the ghost of Ken Lay at 10:00 AM on April 30, 2007

If the two loans are at the same interest rate, then there isn't any financial benefit to paying one down before the other. There is most likely a benefit in that you will feel better about it and it might be less hassle to deal with one loan than two if you pay off the $10K one first.

You are quite right in that you will make almost no progress in paying off the loans if you pay $300 per month. At that rate, it will take you roughly 50 years to pay off the principal of both loans. If you want to pay off the debt in any reasonable length of time, you'll need to be able to pay a larger sum per month - for instance $500 per month will pay it off in about 12 years.

You probably need to sit down and make yourself a budget and then make some cuts in your spending in order to be able to pay down the loan. Many people live on much less than you.

On the other hand, you might want to plan to save for retirement, to buy a house, etc. If you want to save you need to earn better returns that your student loans (which charge about 7% interest from the data given) to make it worth your while. If you want to do some simple investing, you can likely do better than 7%, but if you aren't willing to do that (or accept the risks involved), then your best bet is to pay down the loans as quickly as possible.
posted by ssg at 10:23 AM on April 30, 2007

Can you live someplace cheaper? Say, with roommates? I'm earning less than $25k/yr right now, and I'm still managing to throw a staggering $800/month towards my student loans. I want those fuckers GONE. I pay $350 rent, $200 auto (gas, insurance), $200 food, and $800 towards the loans. If I was earning $40k per year I could easily put more!
posted by bonheur at 10:42 AM on April 30, 2007

If you have no other debt and your rent is low, you shouldn't have any issues at all. I paid off $15k in student loans in a year on that same salary, so you shouldn't have an issue if you budget well and sacrifice a little.
posted by PFL at 11:40 AM on April 30, 2007

Have you spoken to your student loan poviders? I kept in regular contact with mine and they were able to consolidate two of my loans to a better interest rate. I found that they were very willing to work with me to help keep payments within my means. I am of the opinion that you should try to pay as much as you can manage towards debt (loans, credit cards etc). I have all my payments automatically taken out of my account on payday and then I don't even miss it. If it turns out to be too much/unmanageable I can always lower it and my SL people have been good at granting me deferments for a couple of months at at time when I have needed it.

On a separate note, is $43k considered not very much these days? I thought that the median wage was around $33,000? At any rate, when I was making $30,000 I was paying $400/month towards my SL and I had quite a few other outgoings but didn't really have a problem with the size of my payments.
posted by triggerfinger at 12:59 PM on April 30, 2007

sorry, poviders = providers
posted by triggerfinger at 1:00 PM on April 30, 2007

Can't you consolidate? This was a few years ago when rates were much lower, but my g/f consolidated about $40k in student loan debt into two loans at somewhere around 2.5% APR. These days, I'm sure you could get 5% or less. Right now she's only paying around $140 a month, which covers interest plus $10 or $20 a month.

She still gets consolidation offers at better interest rates than what you're paying.
posted by wierdo at 2:27 PM on April 30, 2007

"The problem is that I'm only making about 43,000 dollars a year, so that doesn't leave a lot for this debt."

I would say your problem is not that you are making only $43,000, but that you are living outside of your means.

First off, $43k (at least in the US) is near the median household income of $46k and above the median personal income of a male of $39k. Unless you live in a very expensive region, please do not say only about your income. You are doing better than nearly 50% of the US.

Sure by one definition you are leaving within your means as you are currently able to make the payments required of you. I however would argue that you are not living within your means as you have debt now and are concerned about acquiring additional debt (with a new car) in the nearish future, and I assume you may not be putting enough money into savings and retirement funds.
ribution to your

I could ramble on for awhile that I think you need to reduce your spending, and create a budget, but that's not what you asked really. If you want more advice on that, Personal Finance for Dummies, is a book I highly recommend to pretty much everyone. Or, if you wish I could sum up the key bits that are thinking are relevant here.
posted by fief at 2:34 PM on April 30, 2007

Sallie Mae's first answer is the same one you're getting here: cut back on non-essential items and make/follow a budget. You could look into consolidating and choosing a payment plan that starts out low for the first few years and then ramps up after those years pass. That allows you to pay less when your income is less and pay more a few years out, when presumably you'll be making more. Forbearance is generally for when you have a financial hardship and is only good for a short period of time (like a year). It's probably not a good option for you and I highly doubt you'll qualify. Personally, I think you're making more than enough to be able to throw more than $300 at your loans and that you're freaking out over nothing.
posted by ml98tu at 6:16 PM on April 30, 2007

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