This post is designed to serve 2 purposes: describe my plan and its benefits for others, but also open the plan up to those much smarter than me to criticize if I've overlooked something.
I have ~ 60K in Stafford loans that come out of forbearance in June and I can choose either level payment of $700 or extended level with a minimum of $400
We are fortunate enough to be able to put roughly $2100 per month towards paying down these loans so my initial assumption was to choose the level payment. But after further research of how the payments are applied, it makes sense to choose the extended level payment plan and here's why:
Example for Level Payment: $2100 payment - $700 minimum payment is broken up as $300 towards interest and $400 to pay down principal PRO RATA ACCROSS ALL LOANS - $1400 early payment to pay down principal on HIGHEST INTEREST RATE LOANS
Example for Extended Level Payment: $2100 payment - $400 minimum payment is broken up as $300 towards interest and $100 to pay down principal PRO RATA ACCROSS ALL LOANS - $1700 early payment to pay down principal on HIGHEST INTEREST RATE LOANS
So if you plan to make early payments, by having a lower minimum payment you get to apply more of the excess payment to the higher interest rate loans as opposed to across all loans.
On a totally separate note, by having a lower minimum payment you have much more flexibility in the event of financial catastrophe with a lower monthly obligation. It's like getting a 30 year mortgage instead of a 15 year mortgage but still at the lower 15 year mortgage rate.
I spoke with a surprisingly knowledgeable representative with the loan servicer (Great Lakes) to confirm my assumptions, but please feel free to provide any feedback on details I’ve overlooked or misunderstood.
It seems to me that the extended level plan is always a preferred choice to the standard level plan if you have the discipline to stick to your plan.
Sean
