Can someone explain to me how should I go about paying off my student loans?

Question

I have two loans right now:

$72k Balance - Minimum of ~$500/month payments

and

$30k Balance -Minimum of ~$350/month payments

The part that is confusing me is how much of my money is going purely towards interest. For instance my $72k loan has $400 of my $500/month payments going straight into interest. Meaning if I keep on the track of minimum payments, it would take me nearly 66 years to pay off just that one loan. Will the proportion of my payments towards interest eventually go down? Would it be wiser to spend more each month on loan payments? Will this 1098e help me out a bit? Any advice would be greatly appreciated!

Edit: Also, would it be smarter to try to pay off one loan before the other?

Another Edit: I get paid weekly also, should I start making bi-weekly payments instead of monthly?

Answer 1

It looks like the rate on that first loan is 6-2/3%?

When I look at $72000 principal and a $500 payment, I'm seeing a long term, 24 years. Not 60, but not good either.

Yes, as you pay a bit of principal, the next payment has less interest and even more principal.

I hope your degree is in a field that's lucrative. Or that you're able to get a job that qualifies you for loan forgiveness over time. I'm sorry that advice might seem weak, but aside from that, the best I can offer is to live well beneath your means, i.e. continue to live like a student, and make additional payments.

As far as bi-weekly goes, the lender may not accept partial payments. Set aside the money every two weeks and when you have extra money just make an extra payment amount toward principal.

To pay this off as fast as possible, I'd make as high an extra payment as I could each month to the loan with the higher rate. If the rates are the same, pay it off to the one with the lower balance.

With respect to the debt snowballers, followers of The David, say the rates are simply close, say .25% apart, with the lower balance having the lower rate. If you were to pay this one first, it would occur sooner, of course, and free up that monthly payment, helping your cash flow. But, it comes at a cost.

Note - if, as Noah suggests, the rates are the same, I'd advise to make all extra payments toward the lower balance. That will get you to the point where you've freed up that cash flow for other purposes, whether it's to focus on the higher loan, or anything else you need this for.

Answer 2

Will the proportion of my payments towards interest eventually go down?

Yes. Today would be a good day to do a web search for "amortization schedule". You will quickly learn how to compute precisely how much of each payment goes to interest and how much goes to principal given different payment choices.

Would it be wiser to spend more each month on loan payments?

That depends on your goals and resources, which we know nothing about. If you have extra money you could spend it on debt reduction, or you could spend it on an investment that pays more money in growth or dividends than the interest you'd save. Or you could decide that the longer you have that loan, sure, the more interest you'll pay, but inflation will make future money less valuable.

Basically, by taking out a loan you have chosen to gamble that the thing you bought with the loaned money will be worth the cost of the interest payments in the future, adjusted for inflation. The bank on the other hand is gambling that you're good for the debt and that they can make a reasonable profit off it.

If you have more money to gamble with, which bet is the wisest one is really up to you.

would it be smarter to try to pay off one loan before the other?

If you want to pay off a loan early then always choose the loan with the higher interest rate.

should I start making bi-weekly payments instead of monthly?

That's roughly equivalent to paying off the principal by one additional payment a year. There are two reasons to do so.

The first is that the total interest will be lower and the loan will be paid off faster. You can work out exactly how much with your new found skill at amortization computation.

The second is the simple convenience of knowing that your budget for each pay period is the same. That convenience is worth something; is it worth the amount extra you'll be paying every year? Again, this is for you to decide. Work out how much extra you're paying per year and how much you're saving in the long run, and compare that against the benefit.

Answer 3

If I had to guess (since you provided little information about your loan repayment), I'd guess that you're on the "Extended" repayment plan for your $72k loan, and the "Standard" plan for your $30k loan.

In general, there are 4 main kinds of student loan repayment plans

1. Standard Repayment is usually 10 years of equal payments
2. Graduated Repayment is usually 10 years of payments, where you start out with lower payments, and the payment amount increases every 2 years.
3. Extended Repayment is usually 25 years of equal payments. This can also be graduated (though I'm not sure about the step-up interval...)
4. Income-Calculated Repayment calculates your monthly payment based on your income. (many different kinds here). After so many on-time payments (10/20/25 years, depending on your plan), the remainder of the debt is usually forgiven (may be reported as imputed income, subject to income taxes)

This holds true for federal loans (Direct/Stafford/PLUS). Private loans may not have all of these options, or they may have more.

Running your numbers, I get 300 payments of $500/mo at 6.8% interest for a $72,000 loan, and 120 payments of $345/mo at 6.8% interest for a $30,000 loan.

---

Now, to address your issue of interest vs principal, you should notice that each month you pay, the interest payment is slightly lower, and the principal slightly higher. And if you make bi-weekly payments, you'll see that change a LITTLE bit more quickly (slightly smaller balance accruing interest for 14 days of the month) and you'll also pay slightly less over time.