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I recently graduated with a PhD in mathematics and its time for me to pay back my student loans. Being a mathematician, I sat down and did the math. I realized two things:

  1. There is no feasible investment which I can make that will adequately compensate for the amount of interest I will pay over the life of my loans.

  2. Theoretically, the way to minimize the total cost of the loans is to make very large payments on the highest interest loan until it is repayed and then move on to the next highest interest rate.

Given 1., I decided that the smartest financial move for me at this time is to make the largest payment I can afford on the loans. So now I'm focusing on trying to pay off my loans as quickly as possible, with as little cost to me as possible. Of course, the payment plan 2. is not an option, since I am required to make payments on all the loans. So I proposed the following for myself:

Choose a payment plan which minimizes monthly payments. Then pay very large amounts on the loans with the highest interest rates until they are payed off...and work my way down the list.

Now I'm certainly not a financial wizard by any stretch of the imagination, and there may be things here I am overlooking. So here's my question:

Is there anything in my proposed plan that could cause issues for me in the future? Any possible fees? Strategies I have not considered?

Any advice would be greatly appreciated.

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    It may depend on your loan servicer, but I remember from paying mine off that I could direct the payment to the loan of my choice. I did just what you propose in point 2. It may be that you have to pay the minimum due on all the loans and then any excess you can direct. – Chris Mar 25 '16 at 12:48
  • have you considered a consolidation loan (you can only do it once - but it's often worth it)? – warren Mar 31 '16 at 17:42
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What you're suggesting is definitely a solid plan. Paying off the highest interest loan first, and then proceeding to the lowest, while minimizing the payments you make to other loans to as little above interest as possible, gives you the lowest overall spend over time.

You may be wrong in 1), though I don't think it's either particularly significant or something to be worried about. The market return averages 8% or more over a long period of time, so unless you have very high interest loans, it is possible you could out-earn the interest on the loans. That said, student loan interest rates aren't usually that low that there's a huge difference, and there's something to be said for being debt-free.

Do make sure in all this, though, that you build up an emergency fund - six or so months of expenses at least. Typically you should build that up within a year or two; if you can do better, great, but a year or two is sufficient. Perhaps pay half of what you'd pay on the loans until you've built that safety net up first, and then move on.

  • Thanks for the reply. I did consider stock investments, but I simply don't know enough about it to feel confident in those investments. I believe the average 8% your referring to is taken over an incredibly long period of time and the deviation from that mean can be huge, lasting possibly for decades. So, for me, its too risky when weighed against the alternative. Also, I already have the emergency fund set up, but that is certainly good advice! – Daniel Grady Mar 25 '16 at 15:11
  • Long term = ~10 years, roughly. But certainly - given that you're probably paying 5-6% interest, the safe return is likely the better choice. – Joe Mar 25 '16 at 15:12
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Your plan is good. Here are a few things to consider:

  1. Risk. Even if it was proven that your first point was false (you could out-invest your debt interest), that does not include a risk calculation. The fact is that if you get behind on these payments, your life is about to be hell. Not to mention your cash flow is tied up for years. No debt is options with less risk.

  2. Definitely have a small emergency cash fund in place before placing most of your cash flow onto the debt. Maybe one or two months is my suggestion.

  3. Since you asked for other strategies I will suggest one - simplicity. You did not indicate how many or how much your individual loans were. If you had a few small loans, I suggest hitting those first. This will get you more quickly into a position of having less loans to manage payments on. And you will feel like you've made progress. All things equal, move forward with paying highest interest first!

Good luck!

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    I would also add that you need to hold your lenders hand through the payments. They will do things like distribute your extra payments to ALL the loans on your account, if you have multiple loans with them. You have to tell them again and again exactly what to do with your money. – jkuz Mar 25 '16 at 14:54

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