How best to apply back Student Loan Refund?

Question

After completing Undergrad December 2017 I began making payments on my student loans (#1-5 below), paying more than necessary on the smallest balance of my 6.8% loans (usually owe $340, paying $500). My current Employer offers 100% Tuition Reimbursement on continued education (A/B = 100%, C=75%), so I have enrolled in a Masters of Applied Analytics program (Online). To help offset the cost and not need to front the cash every semester, I went ahead and took out financial aid once more with an award of $15,500. Detailed below:

Loan # | Issue Date | Loan Type | Status | Est. Balance | Interest Rate

1. 09/23/2010 Direct Unsub Stafford Repayment $6,500 6.8%
2. 09/22/2011 Direct Unsub Stafford Repayment $3,200 6.8%
3. 08/20/2012 Direct Unsub Stafford Repayment $5,850 6.8%
4. 08/19/2013 Direct Unsub Stafford Repayment $6,850 3.86%
5. 08/26/2014 Direct Unsub Stafford Repayment $6,750 4.66%

Grad School Loan:

6. 01/04/2019 Direct Unsub Stafford In School $15,500 6.6%

1 Semester costs roughly $5,000, so I have been issued a "Refund" of $10,500 from my latest loan and I am trying to figure out the best way to put that to use (As long as I keep my grades up, the $5,000 I will then get reimbursed from my Employer should be enough to fund most/all of my Masters program in the coming semesters).

Previously I was using the Snowball method under standard repayment and while I owed $350 total each month on my 1-5 loans, I was paying an extra $150 each month directly towards loan #2 (hence the lowest balance of my 6.8% loans). I would like to keep roughly 20-25% back in case I have a semester where something comes up and grades don't meet my Employers Reimbursement policy (hopefully not, but life happens).

Under that plan, that leaves me with ~$8,000 roughly that I could immediately pay back into my loans but I wanted some advice on which one to put that towards?

1. Should I just pay off what remains of Loan #2 ($3,200)? And apply the rest to another loan (if so, put the rest towards the next lowest 6.8% loan or my newest largest balance one?)
2. Put it all towards my latest Loan #6 to reduce that principal back down?
3. Or put it towards, say, Loan #1 so another one of my 6.8% loans is close to being paid off?
4. Or is there a better idea I haven't thought of?

While I am now back in school and not required to pay on my loans, I still intend on fully paying at least $500/mo into my loans just like I was before, just trying to figure out the best way to pay back with my refund. Thanks.

Answer 1

Since none of the loans are subsidized, interest is accruing while you're in school, so the highest interest loan hurts the most. Wipe out as much 6.8% debt as you can.

I'd question whether you actually need to hold any back. Do you have any emergency savings? Could you simply get a student loan for the subsequent semester if needed? You're paying 6.6% to borrow a cushion, if you can only borrow as much as you need each semester you'll save some money, but in some cases it is worth some interest to have cash on hand in case things go south. Many people advocate prioritizing an emergency fund over extra payments on debt.

Answer 2

I would pay off #2 and #3 completely. Not only are they the most expensive in terms of interest, but they are the smallest balances, so they could be cleared in full and still leave you a little bit of "whatever" money to decide on later.

Not having those two balances anymore will reduce your total minimum payment obligation each month, which gives you greater freedom to either continue directing extra payments towards principle or simply be better prepared to weather those "life happens" moments.