Student Loan Repayment Options

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kck2780
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Student Loan Repayment Options

Postby kck2780 » Thu Apr 19, 2007 10:34 am

I'll make this as quick as possible. :)

Husband and I are following Dave Ramsey Total Money Makeover. So far, have eliminated about $10k of debt. Credit card free (wahoo!)
After auto loan is paid off, we are on to student loans.

We are living very modestly, low,low, low rent. Minimal bills, etc.

Here's the fun part:
Student Loans total about $85k
I've consolidated what I can.
About half has been consolidated at 2% fixed. I'm okay with this.
One of our loans is on a variable interest that I can NOT consolidate, being that it is a private loan. It's at about 9.25% right now and on the rise.
Another loan, high-balance, is fixed at 5.25% but the payback period is 10 years (in which we have six years to go, and we had deferred it for the first two years).

Ramsey's philosophy of paying off things has worked thus far, but when it comes to my student loans vs. my auto loans, I'm up in the air. I feel I should pay off the higher balance, variable interest rate account first and then pay off the lower balance, fixed rate accounts later.
For non-Ramsey followers, he suggests ALWAYS paying off the lowest balance (regardless of interest rates) first. Also, the shorter payback loan, if I were to pay that off first it would free up ALOT of money.

I'm torn. What I've done so far has helped considerably, but everytime the interest rates goes up on one student loan (about every 3 months), my monthly payment increases too.....

Any suggestions?

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Postby onebigmortarboard » Thu Apr 19, 2007 11:56 am

As I understand the Ramsey plan, he recommends paying off the lowest balance first because it gives the borrower a sense of accomplishment. That psychological boost can help keep someone going with the reduction program.

However, in a situation like this, where your required monthly payment is likely to be much higher than that for a credit card, I think it's not unreasonable to say that you might get more peace of mind knowing that you are forestalling payment creep. And that in and of itself might help keep you going.

Also, I was in your situation not that long ago. I ended up finding a personal loan "sale" at my credit union that allowed me to refinance my 20-year variable loan (nearing 11% at the time) into a shorter-term, fixed-rate variety. My monthly payment did go up a fair amount, but I knew I'd be paying much less interest over the life of the loan, and I knew that my payment would stay stable. I also gave up the tax deduction, but I still believe it was worth it. Since you've paid down/off your credit cards and car and presumably improved your credit score, I would suggest looking for an alternative like that.

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tinyhands
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Postby tinyhands » Thu Apr 19, 2007 12:11 pm

Sounds to me like you already know what needs to be done and are doing it.
As OBMB pointed out, the Ramsey strategy is more psychological than mathematical. If you're aware of it, you can take the mathematical approach. That is, pay at least the minimum on all loans, then pay whatever additional you can afford to the highest rate debt.

But keep an eye on that term loan too. You don't want to get into trouble if it's going to take you six years (or longer) to pay that off. A bit of simple spreadsheet budgeting should give you an idea here.

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Postby plonkee » Fri Apr 20, 2007 1:35 am

You should do what feels right for you. Personally, I'd pay the variable one off first, as changing levels of payments really bug me.
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Postby JerichoHill » Fri Apr 20, 2007 5:42 am

I'd pay off the variable, interest rates arent going down it appears (bummer)
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Postby nickel » Fri Apr 20, 2007 6:45 am

tinyhands wrote:Sounds to me like you already know what needs to be done and are doing it.
As OBMB pointed out, the Ramsey strategy is more psychological than mathematical. If you're aware of it, you can take the mathematical approach. That is, pay at least the minimum on all loans, then pay whatever additional you can afford to the highest rate debt.

But keep an eye on that term loan too. You don't want to get into trouble if it's going to take you six years (or longer) to pay that off. A bit of simple spreadsheet budgeting should give you an idea here.


I agree. Since you've already tasted success, and are thus properly motivated, you could probably go after the higher/variable rate at this point. Ramsey's approach is designed to give people a quick victory to keep them motivated.


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