Monday, June 11, 2007

Student Loan Repayment Plan…

LawsFinance asked me a great question on what my plan is to repay my student loans. The current balance is $202,933 which is astronomical but not fatal.

Below is a schedule for my student loans including current interest rates, balances and terms.

The IDEAL order of payoff will be as follows:

  1. Perkins Loan ($3k and easiest to pay off)

  2. Private Loans

  3. Grad Plus Loan

  4. Federal Unconsolidated Loans

  5. Federal Consolidated Loans

Current Repayment Schedule:

  1. Federal Subsidized/Unsubsidized – 1/2008

  2. Private Loans – 4/2008

  3. Federal Consolidated & Grad Plus – 6/2008

My Plan:

  1. Save $20k over the next 6 months.

  2. Forbear Federal Subsidized/Unsubsidized for 6-12 months.

  3. Forbear Private Loans for 6-12 months.

  4. Payoff $3k Perkins Loan with bonus.

  5. Payoff first $4.9k Private loan with a combination of tax return proceeds and cash flow.

  6. Begin repayment on Federal Consolidated & Grad Plus – 6/2008. Total estimated monthly payment will be $525.

  7. Continue paying off my HELOC/CC which is at $17k and 3.99% fixed for the life of the loan.

  8. Land a law position paying a minimum of $90k.


Laws Finance said...

Very nice. I only have a vague plan, nothing quite that detailed. But I still have a year of school left too...

Anonymous said...

I apologize if this is a naive question, but I promise that it's a sincere one... is there a reason why you wouldn't pay back all the highest interest loans first?

Chitown said...

No apologies necessary. I am always happy to reason through my logic with someone just in case I can learn in the process.

Basically, I am taking a snowball method where I attack the lowest balance first. Once that loan is paid off, I take that payment and add it to the payment I am making on the next loan. I end up paying back a larger amount monthly until it is paid off in full and continue on with the next loan until they are all paid off in the end. In the meantime, I pay the minimum balance on the remainder of the loans.

The snowball method is just one way to accomplish debt repayment but one that I think will work best for me in the long run. Also for me, most of my student loans have a similar interest rate and my federal loans have the lowest interest rates and are the most flexible. That’s why they are at the bottom of the pecking order. Hope this explanation helps. Just in case, below is an additional explanation from Wikipedia.




From Wikipedia….

The basic steps in the debt snowball method are as follows:
• List all debts in ascending order from smallest balance to largest. This is the method's most distinctive feature, in that the order is determined by amount owed, not the rate of interest charged. However, if two debts are very close in amount owed, then the debt with the higher interest rate would be moved above in the list.
• Commit to pay the minimum payment on every debt.
• Determine how much extra can be applied towards the smallest debt.
• Pay the minimum payment plus the extra amount towards that smallest debt until it is paid off.
• Then, add the old minimum payment from the first debt to the extra amount, and apply the new sum to the second smallest debt.
• Repeat until all debts are paid in full.

In theory, by the time the final debts are reached, the extra amount paid toward the larger debts will grow quickly, similar to a snowball rolling downhill gathering more snow (thus the name). The theory works as much on human psychology as it does on finance; by paying the smaller bills first, the individual, couple, or family sees fewer incoming payment requests as more bills are paid off, thus giving the impression that they are making headway towards debt elimination.