Distributing lump sum to student loans

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mybogledhead
Posts: 42
Joined: Wed Feb 04, 2015 10:25 pm

Distributing lump sum to student loans

Post by mybogledhead » Mon Mar 14, 2016 6:02 pm

Hello,
My wife is about to receive a lump sum for student loan repayment. The agreement is $25K/yr for five years and is coming from her employer. It is possible that she may also receive an additional $12,500/yr for four years, coming from her school/gov, but the application period for that program ends 3/31 and we are not sure she will be selected. In addition, it's important to note that the school/gov amount, if she is selected, won't be given to her (I don't think) until the end of the first year (April 2017) and can ONLY be applied to federal loans.

I'm wondering how to distribute the money over her various loans to have the greatest impact and potentially avoid having to make any payments over the course of next twelve months until she receives the next allotment.

Her Loans
1) Federal Stafford: $9,334 @5.8% 76 months @ $150/mo
2) Federal Stafford: $17,818 @4.55% 78 months @ $270/mo
3) Federal Consolidation: $36,065 @4.5% 318 months @ $179/mo
4) Federal Consolidation: $81,651 @3.5% 318 months @ $405/mo
5) Wells Fargo Private: $14,327 @3.25% ? months @ $106/mo

My plan was to use the initial $25K to pay off the Wells Fargo loan, even though it has the lowest interest rate, then distribute the remaining $10,500 or so proportionally to the federal loans. I'm thinking this will push back our next payment due on the federal loans to 12 months. Most importantly, it will allow us to maximize the benefit of the school/gov award, assuming she gets it, and be able to utilize the employer award for non-federal loans thus maximizing its value as well.

Bottom line, she has the potential to get her loans paid completely. I want to make sure I know how to maximize that value from the very beginning and, potentially, not have to put another single dollar of her income into her loans. Any help or advice would be appreciated!

nps
Posts: 440
Joined: Thu Dec 04, 2014 10:18 am

Re: Distributing lump sum to student loans

Post by nps » Mon Mar 14, 2016 8:01 pm

By my math it would get you 10 months and change according to that plan.

If avoiding any monthly payments as long as possible is the goal why not split it up among all five and get over 22 months?

JGoneRiding
Posts: 989
Joined: Tue Jul 15, 2014 3:26 pm

Re: Distributing lump sum to student loans

Post by JGoneRiding » Mon Mar 14, 2016 8:08 pm

I would pay the first loan in full since 1) you have enough to cover it and 2) its rate is quite a bit higher and then distribute evenly. You could pay the last loan with the next distribution.

Are these taxes as income? Would you be better off if the check was written to the servicing companies directly?

mybogledhead
Posts: 42
Joined: Wed Feb 04, 2015 10:25 pm

Re: Distributing lump sum to student loans

Post by mybogledhead » Mon Mar 14, 2016 8:46 pm

Both sums are, according to my accountant, tax free.

Dividing them up evenly would make sense. My only thought is that by doing it this way I'll be able to maximize the value of each allotment. By paying federal loans with money that doesn't need to go to federal loans, we could be leaving money from the school/gov program on the table and end having some of our own money into it at some point.

The more I think about though, the more it makes sense to split it evenly this year. I can always focus the employer allotment towards Wells Fargo next year.

nps
Posts: 440
Joined: Thu Dec 04, 2014 10:18 am

Re: Distributing lump sum to student loans

Post by nps » Tue Mar 15, 2016 5:50 am

mybogledhead wrote:Both sums are, according to my accountant, tax free.

Dividing them up evenly would make sense. My only thought is that by doing it this way I'll be able to maximize the value of each allotment. By paying federal loans with money that doesn't need to go to federal loans, we could be leaving money from the school/gov program on the table and end having some of our own money into it at some point.

The more I think about though, the more it makes sense to split it evenly this year. I can always focus the employer allotment towards Wells Fargo next year.


Maybe a hybrid approach. Pay 12x monthly payments toward each of the federal loans (or 13x for some margin), then put whatever's left into Wells Fargo. After that's retired put whatever's left into the highest rate federal loan, etc.

AlwaysAStudent
Posts: 86
Joined: Mon Dec 07, 2015 11:38 am

Re: Distributing lump sum to student loans

Post by AlwaysAStudent » Tue Mar 15, 2016 8:24 am

nps wrote:Maybe a hybrid approach. Pay 12x monthly payments toward each of the federal loans (or 13x for some margin), then put whatever's left into Wells Fargo. After that's retired put whatever's left into the highest rate federal loan, etc.


+1 for this.

I would also like to point out that at least in my case the private loan did not push back due dates like my federal loans do. I was required to make that payment monthly no matter how much I paid the previous month until it was paid off. Also wanted to make sure you are aware that even though the federal loans will push your payment back you will still be charged interest every month and it will capitalize based on your loan documents (monthly?).

SleepKing
Posts: 233
Joined: Mon Mar 02, 2015 8:45 am

Re: Distributing lump sum to student loans

Post by SleepKing » Tue Mar 15, 2016 9:10 am

From my knowledge, when repaying Federal loans, they apply payment to accrued interest first. Then, the default of extra payment, would be to the principal of highest interest bearing loan. At least that is what I was told from my servicer, but found it doesn't always get applied that way. Check with your loan servicer for the federal loans to see if you need to call/write and state how you want it applied. If you plan on first lump sum pay-off of private loan, then simply paying the monthly payment to each federal loan out of the lump sum, then your plan would work.

Also, I agree with your plan to pay off the private loan in full regardless, as the school/gov award may-or-may-not happen...and if it does it couldn't go to the private loan.

Something to think about is if she would qualify for any tax deductions during these years. I think you still would be able to claim them based on your payment model, but never hurts to double check.

Congrats to her on the hard work that has led to this opportunity!

Regards,
Sleepy

mybogledhead
Posts: 42
Joined: Wed Feb 04, 2015 10:25 pm

Re: Distributing lump sum to student loans

Post by mybogledhead » Tue Mar 15, 2016 10:48 am

This isn't her first job, and we've been in repayment, so accrued interest on the federal loans will only be for the previous month. She doesn't receive the lump sum until after she starts the new job on 4/4/16, and our loan payments are all on the 28th of the month. Hopefully that 3.5 weeks will be enough time to find out if she was selected for the school/gov program. It would be easier to plan without that uncertainty. If she does not get it, she could reapply next year.

I thought about the fact that interest will continue to accrue monthly. I suppose I could put the lump sum in a savings account and make monthly payments from it, but decided it would be better to apply as much toward principle at the very beginning as we could. I haven't done any math, but I'm guessing the total interest will be less that way, not to mention the fact that by paying from a savings account I would be paying at least 3.5% but only earning 0.75% (CapitalOne360).

Regardless, I think that hybrid approach could work well. According to my math, if I make the equivalent of 13 payments towards federal loans we'll have enough leftover to nearly pay off the Wells Fargo loan. The interest on the remaining balance will be about $85 for the year, if I'm not mistaken. I wrote to Wells Fargo to ask about delaying future payments. That might change the plan.

Thanks for all the ideas and tips.

Carl53
Posts: 1443
Joined: Sun Mar 07, 2010 8:26 pm

Re: Distributing lump sum to student loans

Post by Carl53 » Tue Mar 15, 2016 5:43 pm

Just be sure as to how the excess payments will be applied before you make any extra payments on any of the loans. Try to get any communication in writing and review the loans terms. Also provide written instructions with each payment and keep a copy for yourselves.

campy2010
Posts: 855
Joined: Sun Nov 28, 2010 5:01 pm

Re: Distributing lump sum to student loans

Post by campy2010 » Tue Mar 15, 2016 8:57 pm

mybogledhead wrote:This isn't her first job, and we've been in repayment, so accrued interest on the federal loans will only be for the previous month. She doesn't receive the lump sum until after she starts the new job on 4/4/16, and our loan payments are all on the 28th of the month. Hopefully that 3.5 weeks will be enough time to find out if she was selected for the school/gov program. It would be easier to plan without that uncertainty. If she does not get it, she could reapply next year.

I thought about the fact that interest will continue to accrue monthly. I suppose I could put the lump sum in a savings account and make monthly payments from it, but decided it would be better to apply as much toward principle at the very beginning as we could. I haven't done any math, but I'm guessing the total interest will be less that way, not to mention the fact that by paying from a savings account I would be paying at least 3.5% but only earning 0.75% (CapitalOne360).

Regardless, I think that hybrid approach could work well. According to my math, if I make the equivalent of 13 payments towards federal loans we'll have enough leftover to nearly pay off the Wells Fargo loan. The interest on the remaining balance will be about $85 for the year, if I'm not mistaken. I wrote to Wells Fargo to ask about delaying future payments. That might change the plan.

Thanks for all the ideas and tips.


In my experience, for most federal loans if you make a payment that is equal to 12 months of payments then they would apply the payment to the principal and would then push the next payment due date forward by 12 months. You're technically off the hook for 12-months. But if your autopayment is turned on then the monthly payments will continue so you need to make sure it is turned off or set so the next payment will be made on that future due date. If done correctly, there is no need to worry about a savings account.

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