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Tags: multiple student loans , balancing interest accruals , student loan help

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    Please don't post your entire question as an image. It isn't very indexable, nor friendly to those who may use assistive technologies. – Chris W. Rea Apr 3 '14 at 4:05
  • I apologize but it was the best way to get the formatting the way I wanted. The text input on here isn't the best. If you need any of the text written out let me know and I'll gladly type it for you. :) – kblunt333 Apr 3 '14 at 15:56
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    @kblunt333 - yes, please type the question so it is searchable, indexable, editable, and answerable – warren Apr 3 '14 at 16:05
  • No problem! I'll just post the equations as a picture. – kblunt333 Apr 3 '14 at 17:03
  • Did you edit the question yet? – MilkyWay90 Sep 6 at 2:07
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TLDR

Make the minimum payments on all but the highest rate loan. To that loan, send the payment and as much extra as you can afford. Plain and simple. All else is either extra work or nonsense.

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    Come on! No offense but there's got to be a better answer? A $10,000 loan at a 5.5% interest rate incurs $45.17 and a $5,000 loan at a 8.5% interest rate incurs $34.91 in the same 30 day period? There's money being thrown at the banks if you go that route. What I'm more focused on is applying a large lump sum to these loans, so splitting it up will make a difference in the amount of overall interest I pay. Thanks for your quick response though :) – kblunt333 Apr 3 '14 at 2:40
  • I'm amused, but not offended. If there's a better answer, it will be posted shortly, I'm sure. – JoeTaxpayer Apr 3 '14 at 2:50
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    In your updated comment, the higher rate loan should be prioritized. – JoeTaxpayer Apr 3 '14 at 2:52
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    No. The savings isn't based on the balance owed, but on what you can pay early. You'll save 5.5% or 8.5% on the extra $100 you throw at the loan. The loan balances were not part of my initial answer for a reason. It's irrelevent. – JoeTaxpayer Apr 3 '14 at 2:57
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    same rate? I'd pay off the lower balance card. That would save me the time and effort of dealing with that payment each month. – JoeTaxpayer Apr 3 '14 at 3:19
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There are web sites which help you do these kinds of calculations. One that I have used is PowerPay which shows you how much you save and how the plan to pay off loans works, i.e. you have n payments till the highest interest loan is paid off, and then m additional payments till the next, etc. But the bottom line is no different from what @JoeTaxpayer has already told you: make minimum payments on all but the highest interest loan which gets all the available extra money.

On a slightly different issue, be careful with balance transfer offers from credit cards in which case your balance due has parts that are charged interest at different rates. If you make only the minimum payment, that money is applied to the lowest-interest part of the balance (currently, 0% balance transfer offers abound). It is only the amount in excess of the minimum payment that must, by law (CARD Act of 2009), be applied to the highest-interest part of the balance. Before the CARD Act, credit-card companies applied everything to the lowest-interest parts first.

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Sorry for the late answer, but here goes:

TLDR Version of Question: I should be paying off my loans based off which one has the highest amount of interest per year, right?

TLDR Version of Answer: No. You should be paying off the one with the highest interest rate first.

Here's a really simple example of why. Imagine you've got two loans:

  • A $20k loan with 6% interest
  • A $10k loan with 10% interest

... so the interest on the first loan is $1,200 per year, and the second one is $1,000 per year.

Now, imagine you get a windfall of $10k. What are the strategies you could employ to pay off the loans?

  • Strategy A: pay off half of the large loan. So afterwards, you've got two $10k loans - one with 6% interest and one with 10% interest. So you'd be paying $1,600/year in interest afterwards.
  • Strategy B: put $5k towards both loans. Afterwards, you've got a $15k loan at 6%, and a 5k$ loan at 10%. So you'd be paying $1,400/year in interest ($900+$500)
  • Strategy C: pay off the loan with the larger interest. So afterwards, you've got the $20k loan at 6% interest. So you'd be paying $1,200/year in interest.

If it helps, picture it like this: when you pay off part of a loan, it works out the exact same as if you had invested that money with an interest rate identical to the loan. Paying off a 5% loan a year early saves you just as much money as investing the same amount of money in a 5% interest-rate account.

Once you think about it that way (paying off a loan early is the same as investing that money), it's pretty clear why you'd want to pay off the high-rate loans first: because you're 'investing' your money in the places it'll earn the highest interest rate. In the example above, you've got $10k you can invest in two different accounts: one earning 6% and one earning 10%. Why wouldn't you invest as much as you could into the 10%?

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