What is the best option for repaying student loan?

Question

This is an embarrassing thing for me. Growing up my family believed money is a bad thing that shouldn’t be talked about. I have found this philosophy hasn’t served me well and abandoning it. I recently completed school and am repayment for student loans. A lot of people tell me the interest rate I am paying is high. I’m wondering if there’s anything I can do about it? I got an email today saying I’m eligible for the Repayment Assistant Plan (which would reduce my monthly required payment), but I don’t see how just postponing it would help?

My original repayment amount was $18,820 and my amount owing is $14,220.00. Original term is 114 months and remaining term is 88 months. Current interest rate is 6.45% floating and daily interest is $2.11.

How much should I repay each month? As much as I possibly can? Should I take out a lower with a lower interest to repay this one?

Answer 1

Canadian here with experience with the National Student Loans Service Centre. Currently have 1K left on a loan that started at 36K. Since you mentioned RAP, I'm going to assume your loans are only with the NSLSC or a provincial program similar enough.

I got an email today saying I’m eligible for the Repayment Assistant Plan (which would reduce my monthly required payment), but I don’t see how just postponing it would help?

You can still make payments when using RAP. Stage 1 RAP will cover a portion of the interest. The rate depends on how much you make and your family size. Imagine you have 26K in student loans, make 40K, and have a family size of two. The government will cover the interest (~150$/month). This effectively means when you make payments, 150$/month more will go against the principal of your loan. (Edit: didn't see your numbers at first. RAP, if you qualify, would save you 63$/month.)

A lot of people tell me the interest rate I am paying is high. I’m wondering if there’s anything I can do about it?

6.45 % Floating is the current rate. You get to deduct around a quarter of it from your taxes. That makes the effective rate closer to 4.8%. The loan has other benefits like the aforementioned RAP; if you lose your employment RAP will cover you. I'd personally treat the loan as 0-3.5% because of these side benefits (it's not a loan that will drive you to the poorhouse).

How much should I repay each month? As much as I possibly can? Should I take out a lower with a lower interest to repay this one?

You will not get a lower interest rate anywhere else besides maybe if you roll it into a home loan. Even then though, the flexibility of the NSLSC loan is very useful.

Because the effective interest rate is so loan, 4.8% even if you don't qualify for RAP, this is a funny loan to have. Say if you have 1000$ suddenly fall into your lap. This happens to me occasionally. Do I put it on the loan to 'save' 5%/yr or put into an emergency fund earning 2%? This effectively costs 30$/yr for added security. Is that worth it?

Answer 2

Reading your post, I can think of several reasons to pat yourself on the back:

• The amount of your student loans were not high, yesterday I answered a question for a person that graduated with over 3 times the amount you did.
• You have paid down a healthy portion of the loan already
• You understand that your parents may have had toxic beliefs about money and are seeking knowledge
• You have a sense of the folly of deferring, or making too small of a payment on the student loans.

There is no reason for embarrassment, you are on the path to doing great things.

I would not classify your "problem" as one that is interest rate based. Let's say you got hyper aggressive paying off your loans, perhaps taking a second job to earn more. Let's say you did it in a year. The total interest paid would be $502. So even if you could re-finance at zero percent, and I doubt you could, it would only save you about $500. Sure that is money, but it is no where near life changing.

To me, a far better investment of time and effort is finding a way to earn more to throw at these student loans. Refinancing for a lower interest rate will not save you all that much. There is a far better use of your time.

The key is just to get aggressive in paying off your student loans. I suspect you can be done with these in a year to 18 months and you will be able to enjoy a freedom few of your contemporaries have.

You can do this.

Answer 3

Your core question here is "How much should I repay each month?" so that's what I'm going to focus on.

How much you should repay depends on how you define 'should'. If we're taking the cold, strictly detached and mathematical approach, you should put your money in the place that earns you the most return on your investment. Your loans are earning you negative 6.54% (the rate is lower if we include tax deductions).

If your money cannot earn better than that on its own, you should put it all towards the loans. If you can do better, then you should move your money in another direction. The historical returns for the S&P is around 10% for the past 15 years. Of course, that rate of return is not fixed (but neither are your loans).

However, math isn't the only factor. Emotions and personal satisfaction may come into play. Is feeling debt free worth foregoing a bit of extra interest each year? To some people, it is. If you're wanting to take on additional purchases like a house and having those mandatory student loan payments would be more of a burden, eliminating them might be beneficial.

There isn't a single answer to your question, but there are perspectives that hold equal weight. You'll have to identify your personal priorities, your level of risk acceptance, your probable life trajectory (family, income, job security, retirement goals, etc), and your view of finances in general to decide what's best for you.