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Should I pay off student loan or private loan first?

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Money Talk > Credit & Loans

Which Loan should I pay off? (after having read topic)
Private Loan
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Federal Loan
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jmblock22
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Should I pay off student loan or private loan first?  Reply with quote  

Hey guys, could really use your help!

I have roughly 35k in student debt. $20k from a private loan and $15k from federal.

I have $20,000 to put towards paying off something, and not exactly sure where to put it? I will give you the details on each loan and any insight would be greatly appreciated.

PRIVATE LOAN:

Current Balance: $19,455.86
Monthly Payment (interest only): $69.89
Repayment Term: 216 Months
Interest Rate: 4.21%
Interest Rate Type: STANDARD VARIABLE
Subsidy: NON SUB
Expected Payoff Date: 10/09/2030

FEDERAL LOAN: (type of loan / current balance / interest rate)

DIRECT SUB / $4,473.64 / 6.80%
DIRECT SUB / $3,813.48 / 6.00%
DIRECT SUB / $1,626.79 / 6.80%
DIRECT UNSUB / $1,534.37 / 6.80%
DIRECT SUB / $1,401.38 / 5.60%

So as you can see. It's between some high percentages on my student loan, or a 2+% lower on my private but with a variable rate. If it helps at all, I can probably put about $350 - $500 a month down towards a loan.

Also, I'm looking into buying a house sometime soon (within the next year) and want to know if I should pay off either of the loans in FULL or keep a small balance available for credit score purposes? I have a credit card, pay rent and utilities, but other than that, I am relying on my 2 loans for a good majority of my credit (which is currently 768).

I know it's a bit to take in... but i would be more than grateful for any/all input regarding my dilemma... thanks everyone!
Post Wed Feb 06, 2013 6:25 am
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oldguy
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I would not be in a hurry to prepay any of the loans. The 4.12% loan is a keeper, I would pay only the interest until the VAR starts to inch up.

And I would hold the $20,000 cash in reserve until after the house is purchased - and for a while after that, you'll need some reserve. So don't pay "extra", keep your cash in reserve.

There are a few things that can affect your plan - age? single/married? dependents? family income? cars? 401k?

Eg, a few years from now your new house may have appreciated by $20,000. So you would refi, add $20,000, <4% fixed rate, 30 years, to your home loan. And then use the $20k to pprepay all of the 6.8% IO loans. (you would be converting 6.8% loans to <4% fixed longterm 'keepers'). And you would be glad that you didn't misappropriate your own cash to prepay the loans. It's important to put your income stream to its highest & best use.
Post Wed Feb 06, 2013 1:41 pm
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jmblock22
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I guess I'm slightly confused... why is the 4.2% a keeper? While I realize it's the lower of the percentages, it ~IS~ variable, which means that it could end up skyrocketing to 7 or 8% if the economy feels so inclined to get better. At that point, wouldn't I have a pretty terrible loan on my hands?

To answer your questions:

I'm single, soon to be engaged - no dependents - I make roughly 30k/yr / no car loan / no 401k (company im at has terrible 401k match at the moment).

See, the thing is that with 30k/yr, I'm paying roughly $175/month in pure interest on both loans combined... which is a decent chunk of my change. It would be nice to reduce that... But I am open to other ideas, I suppose I just don't fully understand how NOT paying either of the loans is saving me more money in the long run?

BTW, by buying a house "soon", I mean within the next year or two.
Post Wed Feb 06, 2013 2:15 pm
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littleroc02us
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If it were me I'd pay off the 15k Federal loan which will free up an amount which I'm not sure of because you didn't state the term. Then I would take the remaining 5k and put it towards the 20k loan. If your thinking of buying a home before you pay off the personal loan (which I wouldn't do because having debt can be very risky) then I would take the extra $500-600 a month and start saving that for a 20% downpayment. In 3 years you could easily have around 20k again.

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Wed Feb 06, 2013 2:21 pm
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oldguy
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quote:
I suppose I just don't fully understand how NOT paying either of the loans is saving me more money in the long run?


When my wife and I were young, we made a plan to direct our extra income into 10%/yr to 12%/yr investments rather than using it to prepay loans. Eg, your $20,000 lump sum would be $460,000 in 30 yrs. And the $350/m to $500/m would add $930,000 to $1,350,000 to that $460,000 fund. So we have kept loans on our cars/trucks for 45 years - and we refi our rental houses whenever there is equity in one of them.

quote:
no 401k (company im at has terrible 401k match at the moment).


My 401k didn't have a match ('matches' were invented after I retired). But I had about a million in my 401k when I retired - ie, a match is nice icing but it isn't the whole cake. After you are married, the tax benefit of a 401k might mean more to you, depending on your wife's income.
Post Wed Feb 06, 2013 3:19 pm
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raemart
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Yikes to OldGuy! I wouldn't pay interest unless I absolutely had to. And if OldGuy wasn't in a stable fund in 2008, he is just now recovering his million dollars. I would probably payoff the federal as there is no forgiveness on federal student loans, ever. You will owe that to the grave. Put your balance on the the private loan. I don't think interest rates are going to rise anytime soon. If you are going to be in the same area for a long time, I would buy a home asap. You will never recover rent money. Since rent is a given, it should be paid on a mortgage and not to a landlord. Good Luck!
Post Fri Feb 08, 2013 1:39 am
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oldguy
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quote:
I wouldn't pay interest unless I absolutely had to.
"stable fund in 2008, he is just now recovering his million dollars"
I would buy a home asap. You will never recover rent money.


One very important truth - with investing, never follow your intuition, always do the math. Eg, your intuition is to avoid interest - but I've had 6 mortgages on 4 houses at one time, and I finance every car that we buy. Have you heard people say "I'm waiting for the market to recover so that I can get back in"? That kind of false logic keeps people poor. And worrying about 4 or 5 yr bumps in the market - that is folly - the market cannot be timed and you should not try. And no, rent is not wasted money - you are buying mobility/flexibility - never buy unless you plan to be there more tha 5 yrs.

It is fairly straight-forward for a middle income wage earner to become a multi-millionaire, yet very few do it. Why? Intuition - it leads them to do almost everything backwards with their income stream.

One example - say I want a $25k car. I could sell $28k out of my sp500 fund that has average 11%/yr for 35 yrs, use $3000 to pay the capital gains tax on profit and $25k to pay for the car.
Or, I could 100% finance the new car for 5 yrs and pay about $28k in payments. I sell my old car for about $4k and add that to my SP500 fund. So I leave that $32,000 in my fund where, on average, it doubles every 6 1/2 years - ie, I'm paying $28k in payments while I'm growing my $32k to $64k. Some would say it's dumb to make car payments, especially if you're a multi-millionaire - OTOH, how do you think common wage earners get to be $mm's?
Post Fri Feb 08, 2013 2:22 am
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raemart
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It seems you would always be out the $3,000 whether you pay it in interest on a long-time car loan or you pay capital gains tax on the borrow from your trading account(s). Plus you are always on the hook for meeting a payment every month, every month, every dang month!....although that's much easier these days with easy-pay; bill-pay, set-ups, e-banking, etc. I am new here to get information myself regarding stock trades, how-to's, etc. and this was the first post I read. lol. Just testing the waters. Good Luck to you both!
Post Fri Feb 08, 2013 6:56 am
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oldguy
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quote:
It seems you would always be out the $3,000 whether you pay it in interest on a long-time car loan or you pay capital gains tax on the borrow from your trading account(s).


Right - but it's the $64,000 that makes it attractive. Very Happy
Post Fri Feb 08, 2013 11:55 pm
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Sarchus
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quote:
Originally posted by oldguy
When my wife and I were young, we made a plan to direct our extra income into 10%/yr to 12%/yr investments rather than using it to prepay loans. Eg, your $20,000 lump sum would be $460,000 in 30 yrs. And the $350/m to $500/m would add $930,000 to $1,350,000 to that $460,000 fund. So we have kept loans on our cars/trucks for 45 years - and we refi our rental houses whenever there is equity in one of them.

My 401k didn't have a match ('matches' were invented after I retired). But I had about a million in my 401k when I retired - ie, a match is nice icing but it isn't the whole cake. After you are married, the tax benefit of a 401k might mean more to you, depending on your wife's income.

quote:
Originally posted by oldguy
One very important truth - with investing, never follow your intuition, always do the math. Eg, your intuition is to avoid interest - but I've had 6 mortgages on 4 houses at one time, and I finance every car that we buy.


Hi oldguy,

Are you kinda saying that whether we're deep in debt or not, we should try to invest a majority of our savings in something like an all-index 401k thats aggressive and with low management costs; and even when my math seems way worse than my intuition?

Thank you!
Post Sat Feb 09, 2013 5:34 am
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