questing regarding student loans

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Topic Author
barranquilla
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Joined: Fri Nov 15, 2019 5:07 pm

questing regarding student loans

Post by barranquilla »

good evening bogleheads

I have a q regarding student loans

I have 2 student loans, one from undergraduate and one from grad school
both are < 3% in interest

the undergrad one is about 3K and the grad school loan is significantly more

what I am noticing is that for both loans, despite being low rate, when the payment is applied, about 25% of my payment goes to interest

out of a $40 payment, about $33 is applied to my principle and 7$ is applied to the interest

the other larger loan is similar

out of $1700 about $1200 is principle and $500 is to interest

this seems like a very large amount being paid to interest, but traditionally I have read that low rate loans should fall pretty low on where your money is applied to given investments should typically outgrow low rate loans

I already max out my IRA every year, and I am already maxing out all of my work retirement plays (403b 457 401a) with any money left over I have been adding a little bit to my brokerage account

im already saving > 25%-30% of my gross income in my retirement accounts and I have an emergency fund

should I forego adding to my brokerage account in lieu of paying down my low interest rate debt down faster? or should I just keep these loans on autopay and pay them off over as long a period as possible. it just seems the interest chunk is so high !

am I not understanding something / seeing something wrong?

thanks
randybobandy
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Re: questing regarding student loans

Post by randybobandy »

Are you sure you have your interest rates correct?

7/40 is a lot less than 25% of the payment.

-RBB
Grammar and spelling matter. | Quoting the OP isn't a necessity.
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arcticpineapplecorp.
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Re: questing regarding student loans

Post by arcticpineapplecorp. »

this isn't answering your question but are you eligible for PSLF (I see you have a 457b and 403b)?

are these Direct loans or other types of federal subsidized and/or unsubsidized loans or are they private loans?

if so, I wouldn't be in any race to pay off the loans not just because of the low interest rate but because you might be eligible for a reduced payment under pslf and any amount not paid after 10 years would be written off (and no taxes owed).

https://studentaid.gov/manage-loans/for ... ic-service
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Topic Author
barranquilla
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Re: questing regarding student loans

Post by barranquilla »

randybobandy wrote: Tue Jun 21, 2022 9:16 pm Are you sure you have your interest rates correct?

7/40 is a lot less than 25% of the payment.

-RBB
You are right, it’s closer to 17%, it’s just seems still like a lot

I went and looked at the loan from undergrad, it is 2.32%

My question still remains unanswered regarding paying it down faster with extra payments
Topic Author
barranquilla
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Re: questing regarding student loans

Post by barranquilla »

arcticpineapplecorp. wrote: Tue Jun 21, 2022 9:19 pm this isn't answering your question but are you eligible for PSLF (I see you have a 457b and 403b)?

are these Direct loans or other types of federal subsidized and/or unsubsidized loans or are they private loans?

if so, I wouldn't be in any race to pay off the loans not just because of the low interest rate but because you might be eligible for a reduced payment under pslf and any amount not paid after 10 years would be written off (and no taxes owed).

https://studentaid.gov/manage-loans/for ... ic-service

They are Private loans, although I do have some federal ones that I might to public service for

Still wondering if I should pay the minimum versus apply extra payments and pay faster, 17% seems like a fair bit of interest to be paying every month
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SmileyFace
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Re: questing regarding student loans

Post by SmileyFace »

If they are not fed subsidized loans you are probably also paying deferred interest starting from the day they gave you the money. In other words, if they lent you the money 5 years ago but payments are just starting - you may have 5 years of interest that accrued that you need to pay - this accrued interest may be spread out over the payments (and you continue to pay interest on that accrued interest). Read the fine print in your loan agreements.
"Compounding interest" works in your favor when saving, but is works against you when borrowing.
Last edited by SmileyFace on Wed Jun 22, 2022 7:33 am, edited 1 time in total.
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user9532
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Re: questing regarding student loans

Post by user9532 »

barranquilla wrote: Tue Jun 21, 2022 8:42 pm good evening bogleheads

I have a q regarding student loans

I have 2 student loans, one from undergraduate and one from grad school
both are < 3% in interest

the undergrad one is about 3K and the grad school loan is significantly more

what I am noticing is that for both loans, despite being low rate, when the payment is applied, about 25% of my payment goes to interest

out of a $40 payment, about $33 is applied to my principle and 7$ is applied to the interest

the other larger loan is similar

out of $1700 about $1200 is principle and $500 is to interest

this seems like a very large amount being paid to interest, but traditionally I have read that low rate loans should fall pretty low on where your money is applied to given investments should typically outgrow low rate loans

I already max out my IRA every year, and I am already maxing out all of my work retirement plays (403b 457 401a) with any money left over I have been adding a little bit to my brokerage account

im already saving > 25%-30% of my gross income in my retirement accounts and I have an emergency fund

should I forego adding to my brokerage account in lieu of paying down my low interest rate debt down faster? or should I just keep these loans on autopay and pay them off over as long a period as possible. it just seems the interest chunk is so high !

am I not understanding something / seeing something wrong?

thanks
When you calculate the payment amount on a loan, the payment amount will be a fixed amount throught the period (unless you pay extra). When the outstanding principal amount on a loan is high, the interest portion on the payment amount will be high because the outstanding principal is high. The amount left over after interest payment is applied to the outstanding principal. As the principal amount goes down, the interest portion becomes smaller and a larger portion will be applied to the principal.

Let me explain this with an example. Suppose you take a $10,000 loan at 3% for 10 years. Your monthly payment amount will be $96.56. At the time of your first payment, you have a balance of $10,000 outstanding. Interest on 10K at 3% for one month is $25.48, and the remaining $71.08 is applied to the principal. Next month your interest will be a little lower at $25.30 (because principal has come down by $71.08) so a little more will be applied to principal. Suppose you continued payment for 7 years. Seven years later your outstanding principal will be $3322.15 and the interest portion will be only $8.46 and the remaining $88.10 will be applied to principal. In other words, as the principal balance goes down, more of your payment will go towards bringing your remaining principal down.

If you are interested, you can download a customizable amortization template in Excel here:

https://eworkpaper.com/tools.php
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SmileyFace
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Re: questing regarding student loans

Post by SmileyFace »

user9532 wrote: Wed Jun 22, 2022 7:24 am
Let me explain this with an example. Suppose you take a $10,000 loan at 3% for 10 years. Your monthly payment amount will be $96.56. At the time of your first payment, you have a balance of $10,000 outstanding.
One mod to your example for typical nonsubsidized student loans:
In the case of the OP his first payment may be deferred such that at time of his first payment his balance is an amount that is HIGHER than $10,000 (first year of deferral balance climbs to 10,300, second year ~10,690, and so on). The often unknown beauty of unsubsized student loans with payments deferred until after you graduate.
Last edited by SmileyFace on Wed Jun 22, 2022 7:50 am, edited 1 time in total.
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user9532
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Re: questing regarding student loans

Post by user9532 »

SmileyFace wrote: Wed Jun 22, 2022 7:38 am
user9532 wrote: Wed Jun 22, 2022 7:24 am
Let me explain this with an example. Suppose you take a $10,000 loan at 3% for 10 years. Your monthly payment amount will be $96.56. At the time of your first payment, you have a balance of $10,000 outstanding.
One mod to your example for typical nonsubsidized student loans:
In the case of the OP his first payment may be deferred such that at time of his first payment his balance is an amount that is HIGHER than $10,000 (first year of deferral balance climbs to 10,300, second year 10,690, and so on). The often unknown beauty of unsubsized student loans with payments deferred until after you graduate.
yes
Topic Author
barranquilla
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Re: questing regarding student loans

Post by barranquilla »

user9532 wrote: Wed Jun 22, 2022 7:24 am
barranquilla wrote: Tue Jun 21, 2022 8:42 pm good evening bogleheads

I have a q regarding student loans

I have 2 student loans, one from undergraduate and one from grad school
both are < 3% in interest

the undergrad one is about 3K and the grad school loan is significantly more

what I am noticing is that for both loans, despite being low rate, when the payment is applied, about 25% of my payment goes to interest

out of a $40 payment, about $33 is applied to my principle and 7$ is applied to the interest

the other larger loan is similar

out of $1700 about $1200 is principle and $500 is to interest

this seems like a very large amount being paid to interest, but traditionally I have read that low rate loans should fall pretty low on where your money is applied to given investments should typically outgrow low rate loans

I already max out my IRA every year, and I am already maxing out all of my work retirement plays (403b 457 401a) with any money left over I have been adding a little bit to my brokerage account

im already saving > 25%-30% of my gross income in my retirement accounts and I have an emergency fund

should I forego adding to my brokerage account in lieu of paying down my low interest rate debt down faster? or should I just keep these loans on autopay and pay them off over as long a period as possible. it just seems the interest chunk is so high !

am I not understanding something / seeing something wrong?

thanks
When you calculate the payment amount on a loan, the payment amount will be a fixed amount throught the period (unless you pay extra). When the outstanding principal amount on a loan is high, the interest portion on the payment amount will be high because the outstanding principal is high. The amount left over after interest payment is applied to the outstanding principal. As the principal amount goes down, the interest portion becomes smaller and a larger portion will be applied to the principal.

Let me explain this with an example. Suppose you take a $10,000 loan at 3% for 10 years. Your monthly payment amount will be $96.56. At the time of your first payment, you have a balance of $10,000 outstanding. Interest on 10K at 3% for one month is $25.48, and the remaining $71.08 is applied to the principal. Next month your interest will be a little lower at $25.30 (because principal has come down by $71.08) so a little more will be applied to principal. Suppose you continued payment for 7 years. Seven years later your outstanding principal will be $3322.15 and the interest portion will be only $8.46 and the remaining $88.10 will be applied to principal. In other words, as the principal balance goes down, more of your payment will go towards bringing your remaining principal down.

If you are interested, you can download a customizable amortization template in Excel here:

https://eworkpaper.com/tools.php

Thank you, I am understanding your example

The reason I used the undergraduate and graduate loan is because the undergraduate loan is only about 3-4K, while the graduate loan is maybe 200K

But both loans Seem to have a significant amount of the payment applies to interest despite being vastly different amounts

In any case, do you think it is sound reasoning to just pay the loan off for as long as possible as most people advocate since it’s low rate ?
Topic Author
barranquilla
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Re: questing regarding student loans

Post by barranquilla »

SmileyFace wrote: Wed Jun 22, 2022 7:38 am
user9532 wrote: Wed Jun 22, 2022 7:24 am
Let me explain this with an example. Suppose you take a $10,000 loan at 3% for 10 years. Your monthly payment amount will be $96.56. At the time of your first payment, you have a balance of $10,000 outstanding.
One mod to your example for typical nonsubsidized student loans:
In the case of the OP his first payment may be deferred such that at time of his first payment his balance is an amount that is HIGHER than $10,000 (first year of deferral balance climbs to 10,300, second year ~10,690, and so on). The often unknown beauty of unsubsized student loans with payments deferred until after you graduate.
My undergrad loan is stafford subsidized ffelp
2.32% with $3300 left on the balance

would you advocate to continue my monthly $40 payments and pay off as long as possible despite like 17% each month going to interest ? (33 to principle 7 to interest )

It just feels like such a large chunk is being applied to interest

Wasn’t sure if foregoing investing and paying it down faster is more optimal
Ron Ronnerson
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Re: questing regarding student loans

Post by Ron Ronnerson »

barranquilla wrote: Wed Jun 22, 2022 9:07 am
SmileyFace wrote: Wed Jun 22, 2022 7:38 am
user9532 wrote: Wed Jun 22, 2022 7:24 am
Let me explain this with an example. Suppose you take a $10,000 loan at 3% for 10 years. Your monthly payment amount will be $96.56. At the time of your first payment, you have a balance of $10,000 outstanding.
One mod to your example for typical nonsubsidized student loans:
In the case of the OP his first payment may be deferred such that at time of his first payment his balance is an amount that is HIGHER than $10,000 (first year of deferral balance climbs to 10,300, second year ~10,690, and so on). The often unknown beauty of unsubsized student loans with payments deferred until after you graduate.
My undergrad loan is stafford subsidized ffelp
2.32% with $3300 left on the balance

would you advocate to continue my monthly $40 payments and pay off as long as possible despite like 17% each month going to interest ? (33 to principle 7 to interest )

It just feels like such a large chunk is being applied to interest

Wasn’t sure if foregoing investing and paying it down faster is more optimal
Your interest rate may be 2.32% but that doesn’t account for inflation. Your real interest rate is likely negative because inflation is running relatively high at the moment.

I am a huge fan of low-interest debt but I would likely just pay it off since the balance is only $3300. It will help your cash flow a little bit if you eliminate a monthly payment and thus make life a little simpler. If the remaining loan were larger, I’d take my time paying it off at this low rate.

There is a caveat. If you think the loan may be forgiven, just continue to make minimum payments. The government sometimes forgives debt that is owed (it was done recently for people who underestimated their income for subsidies on the health care exchange, for instance) and one can only receive the blessings of forgiveness by being in debt. I would weigh the likelihood of the debt being forgiven as I consider this decision.

On a side note, I am purposely going into credit card debt (on 3 new cards) right now at 0% and will pay back what I charge before the promo rates expire sometime next year. My rate on this debt is not really 0%. The money I would use to pay the balance in full is instead in I Bonds, earning 9.62% at the moment. So the way I see it, my interest rate on the credit cards is actually -9.62% right now.

Low-interest debt in times of high inflation can be advantageous. Being debt-free offers simplicity, improved cash flow, and peace of mind, though. So take your pick.
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