topic Re: Extended Repayment - Graduate - 2 year and 4 year - help! in Student Loans

Extended Repayment - Graduate - 2 year and 4 year - help!

Anonymous — Sat, 23 Mar 2013 15:41:45 GMT

Sallie only offers extended repayment up to 25 years with 2 and 4 years of paying interest only. Does that mean future interest owed? Or present interest only payments? My thought is to stretch the loan out as long as possible and lump down a giant payment on it (90% of the balance due). The student loans are tremendously helping my score, so I'll like them to stay as much as possible.

Does my question make sense?

Re: Extended Repayment - Graduate - 2 year and 4 year - help!

Simply827 — Sat, 23 Mar 2013 15:45:30 GMT

It's your current interest payment. If you can pay off a bulk of your loan now, I'm not understanding why you would go for an extended plan. When you pay a larger amount, your payment amount will still be the same, so you'll still end up paying it off early.

Even once you pay off your student loans, they will still help your score as they will report for up to 10 years after payoff.

Re: Extended Repayment - Graduate - 2 year and 4 year - help!

Anonymous — Sat, 23 Mar 2013 15:59:52 GMT

My payment now is $400 and the extended repayment will get it down to $166. Not being obligated to pay my loan for 25 years at a lower payment seems good. If I can pay a big bulk of the loan down to only 10% - will be great. If, in the future, I can't make the $400 monthly payment, I at least can make the $166 payment.

Re: Extended Repayment - Graduate - 2 year and 4 year - help!

Simply827 — Sat, 23 Mar 2013 16:14:19 GMT

Wouldn't it be better to just get rid of it altogether?

If you made a 90% payment to your loans, you wouldn't have that much longer to go payment wise. If you're worried about affording a payment in the future, I think it's best to not have one to worry about.

Now I'm confused as to what you're concerned about. Is it fear of not being able to make a payment later or wanting to keep them around to help your score.

I'm guessing you have about 40K in SL debt. Paying 90% will leave you with about 4K. No matter which you choose, you'll be done paying in no more than 3. I'm not sure why you think you have 25 years to pay. The only way that would happen is if you don't apply it to the principal. I think that's foolish as it isn't saving you any money.

Re: Extended Repayment - Graduate - 2 year and 4 year - help!

Anonymous — Sat, 23 Mar 2013 16:42:34 GMT

I want to keep them around to help my score (at least a while with cushion). But I want to pay them down because some of them have high interest ~7%.

I'd like to do a bulk payment, so I don't feel obligated to pay $400 every month. It just pushes my next payment date back.

Ideally, I'd like to pay a bunch down, and maybe 4 years completely pay the remaining off. I only have 1 cc, so my score is pretty much linked to my student loans.

Here is my math. $40K now. I have AAoA from SLs being 8 years (great pay history). If I stretch the payment out 25 years, for example, and pay 90% down to 4K then I pay $280 interest a month. Some of my loans are 2.3% interest, so if I pay the ~7% off first, it essentially is interest-free. My payment or next payment date would be due like 10 years from now. Now 4K (or 10K or 20K) @ 2.3% could go to a ROTH IRA and get 10% interest and pay it off in 5 years while making money.

So I just got 2 new cards, which I'd like to age at least 4-5 years. I also feel the money could be used elsewhere. If I pay just enough to stretch it, and effectively pay down the ~7% interest loans and keep the 2.3% interest reasonable, the money could be better in a retirement account.

Re: Extended Repayment - Graduate - 2 year and 4 year - help!

SCF — Sat, 23 Mar 2013 18:03:54 GMT

If you want these loans to have a positive long-term impact on your credit, just keep making on-time payments. Closed accounts stay on your report for 10 years, and continue to contribute to your AAoA. Even if you paid the loans off today, by the time they fell off your other accounts would have enough age to keep your AAoA from changing substantially and impacting your score.

The lower payment on a graduated payment plan does not last all 25 years, you cannot just make interest-only payments on loans indefinitely, or when you feel like it throughout the loan term. You would have a reduced payment for 2 or 4 years, and then have a payment due that is somewhat higher than your current base amount to make sure the rest of the loan is paid off on-time.

You're setting yourself up to pay more interest and have a much more complicated situation that you need to.

Are these federal loans? If so, any time you have trouble making payments, you can request a hardship deferment or switch to the IBR plan, which is based on your income, giving you the flexibility you want in payment amount without extending your loan or not paying the principal for 2-4 years.

I would decide how much of your lump sum you would like on-hand vs. for other financial goals vs. for student loans, and then pay down as much as you can now. Then, find a payment amount at or above the minimum that is comfortable for you and make it until they are paid off. You're correct that you should use your lump sum to pay down the highest interest loans first for the greatest savings.

In the end, I really think the best path is the one that you gets you out of debt the quickest without completely sacrificing other savings goals, because you'll have way more flexibility when that debt is gone.

Re: Extended Repayment - Graduate - 2 year and 4 year - help!

Anonymous — Sun, 24 Mar 2013 02:33:37 GMT

The base problem is that my payments are $400 a month and crippling me. It is tough paying it right now. But I do have some savings to pay a lump sum right now. If I pay the high interest loans first, it doesn't cover me for the entire balance, and I will have to continue to pay $400 a month.

If I want to lower my payments then my only option is an extended repayment (2 year or 4 year interest pay) to about $150 a month. I can save enough to make a lump sum payment to the high interest loans, while able to pay the loan everything month. Or do a lump payment to the entire loan and delay it.

Now, I could use such a lump payment to a ROTH IRA while I still qualify. So my plan was to extend the payments (reducing my monthly payment), pay down the high interest loans, and contribute to my ROTH IRA. Over the next 2 years, I should have enough saved to completely pay off the loan and contribute to my 401k and Roth IRA.

Re: Extended Repayment - Graduate - 2 year and 4 year - help!

SCF — Mon, 25 Mar 2013 03:54:44 GMT

You're the only one who knows enough about your finances to know if that plan is going to be the best one for you. You'll want to consider how likely you will be to save enough to pay off some or all of the loans at the end of that 2-4 year pay-off period, how valuable that initial contribution to your IRA is, both mentally and financially.

It sounds like these are private loans if IBR and deferment are not options for you. Private student loans are not "good" debt in my mind. They are impossible to discharge in bankruptcy and seem to cause more than their fair share of grief if you make a mistake or have trouble. In your shoes, I would probably do my utmost to pay them off as soon as possible, but like I said, only you can decide what path is best.

Re: Extended Repayment - Graduate - 2 year and 4 year - help!

Anonymous — Tue, 26 Mar 2013 14:17:37 GMT

Here is the math:

Current Situation

$30K loan over 10 years = $400 monthly payments (my life is devoted to paying these monthly bills). Or make lump payments to pay off in a few years (no money going to IRA, retirement or invesstment funds). Or payoff in 8-9 years @ blend of 6.8% and 2.3%

Proposed Situation

$30K loan over 25 years = $166 monthly payment (I can have somewhat of a life with breathing room). Pay $10K down in the 6.8% interest category, and leave $20K in 2.3% interest. Save bonus/extra pay for paying down the loan within 4 years - $5-10K balance. Use remaining money to put into a high yield IRA. Pay off the $10K (2.3%) loan in under 10 years.

The point is to have some breathing room if I can't make a lump payment. But does the 2 or 4 years mean I am paying current-to-date interest and future interest?

Re: Extended Repayment - Graduate - 2 year and 4 year - help!

SCF — Tue, 26 Mar 2013 18:32:51 GMT

An interest-only payment plan only pays the interest that HAS accrued on the loan. It doesn't pay future interest or principal in most cases. That said, maybe they do have a payment plan that covers future interest too somehow? I would look through the documentation carefully to determine how your payments will be applied.

Re: Extended Repayment - Graduate - 2 year and 4 year - help!

Anonymous — Wed, 27 Mar 2013 02:59:41 GMT

I just want to pay the current interest. Like I mentioned, I intend to pay the loan off in under 4 years (maybe even 2). But I want to keep my obligated-can't-go-back-on monthly payments low, and any more of a payment, being extra to help pay it down.

Re: Extended Repayment - Graduate - 2 year and 4 year - help!

twall06 — Wed, 27 Mar 2013 06:54:25 GMT

Even if you pay a large lump sum and you do not have a payment for ten years it will be factored into your dti ratio. If I paid 10000 I would want it to be applied to the
principal . But whatever you feel comfortable with is what you should do .

Re: Extended Repayment - Graduate - 2 year and 4 year - help!

Anonymous — Sat, 30 Mar 2013 09:56:22 GMT

Well if I hit hard times and can't afford $400-$500 a month in student loan payments (I live in the Bay Area), at least I won't be obligated to pay it.

But does doing an extended repayment plan (2 or 4 years) have any "special" considerations except that it stretches the loan out 25 years?

It is basically like a 30 year mortgage instead of a 15 year one?

Re: Extended Repayment - Graduate - 2 year and 4 year - help!

kjel — Sat, 30 Mar 2013 21:59:41 GMT

It appears that the monthly payment of $400 isn't comfortable but you also do not want to be on a 25 year payment plan.

A few considerations before making a lump sum payment:

Do you have an emergency fund?

What does your retirement savings look like currently?

Do you have other debt that makes sense to service faster or more intensely?

I caution anyone trying to beat the terms of their loan repayment because you are entirely at the mercy of the payment processing team in how payments are applied plus the customer service reps who will inevitably be fixing their mistakes not to mention how much time you are going to spend tracking and explaining things to them. I worked in the banking industry and can tell you all sorts of stories about how payment processing goes amiss. It really screws with the loan amortization!

If I were you, I'd take the longer term repayment plan at a lower monthly payment. It frees up your current resources while not putting you in a bind to deal with other financial priorities that you might have. It also still allows you to build a good payment history for however long you desire. I believe you can knock 0.25% off using recurring ACH withdrawal as your form of payment as well. Just because you have a 25 year repayment plan at $XXX/month does not mean that you can't pay additional amounts going exclusively towards the principal (send separate from your monthly payment and mark PRINCIPAL ONLY on the check). I'd suggest doing this quarterly. By reducing the principal you reduce the amount of interest being charged on the loan as well as decreasing the life span of the loan because more of your regular payments will be allocated to the principal than the interest.

There are many amoritizing loan calculators on the internet and some allow you to see the impact of extra payments. A fair number can be downloaded to Excel as well. Spend some time utilizing these tools, thinking about your overall financial picture, what goals you would like to achieve in the next couple of years, etc. and understand the limitations of the servicer.

Re: Extended Repayment - Graduate - 2 year and 4 year - help!

Anonymous — Thu, 04 Apr 2013 02:40:28 GMT

Hey thanks for the response.

I do have an emergancy fund set up just in case.

My retirement savings is pretty non-existant right now, so I'm focusing on funding it.

I have no idea debt except minor periodic credit card that I pay off every month.

My concern was that I get on a 25 year plan that I can't pre-pay and get forced interest on. I'd be game to pay my yearly IRS deductible ($5200 a year) where I would pay off the loan in 4-5 years. But I would immediately (after approval) move to pay down or pay off the 7% interest.

Re: Extended Repayment - Graduate - 2 year and 4 year - help!

kjel — Thu, 04 Apr 2013 04:45:20 GMT

See if they can send you a loan term document. As long as it doesn't say that you cannot prepay or there is a penalty involved for prepayment then you can pay as I suggested above. Get some funds into your retirement account (set it and forget it seriously) and funnel whatever extra you have towards the student loans.

Re: Extended Repayment - Graduate - 2 year and 4 year - help!

Anonymous — Thu, 04 Apr 2013 07:26:43 GMT

Wait. Why would this be factored into my DTI? Wouldnt it help paying a lump $10K down, no?

Re: Extended Repayment - Graduate - 2 year and 4 year - help!

SCF — Thu, 04 Apr 2013 18:50:08 GMT

Most lenders use your reported monthly payment in calculating your debt-to-income, rather than the total balance. Even if you pay well ahead, most lenders will still report your expected payment amount on your credit report, or when another lender contacts them for information, so the full payment would factor into your DTI until you pay off the loan entirely.

Re: Extended Repayment - Graduate - 2 year and 4 year - help!

Simply827 — Thu, 04 Apr 2013 21:02:08 GMT

I'm pretty sure if you make a lump sum payment AND delay the due date it will be applied to both future principal and interest. Once again, not saving you any money. If you can pay off any of your high interest loans in full do that.

If you can afford to pay off most of your loans now and do so, you can quickly start funding your retirement and savings accounts. I think you're just making the situation more complicated than it should be.

Re: Extended Repayment - Graduate - 2 year and 4 year - help!

kjel — Thu, 04 Apr 2013 22:21:55 GMT

Debt-to-income ratio is based on the reported normal monthly payments. If you were to make a lump sum payment it doesn't not change the terms of the repayment agreement. Don't make it more complicated than it has to be.