Which student loan repayment option is best?

vlagrl29 · September 2014

I've been on the graduated payment plan as soon as I started paying back my loans. This month the payment is to go up $120/month. I would prefer to keep it at a lower amount and pay more than the minimum each month. I've recently heard about income based repayment plans. Regardless, I will most likely pay more than the minimum of whichever plan I choose. I know a lot of you here have student loans - which payment plan do you think is better?

blondie42107 · September 2014

I am on a graduated plan as well and do the same. My interest rate is pretty good so I'm not too worried. I guess I like knowing what is a head. Income based would be to gray for me, personally.

KatieCutie05 · September 2014

All mine are on graduated too. But if your just going to pay more anyway then I would just put it on standard. Remember with student loans if u pay extra, all you are doing is prepaying interest.... None of it goes to principal unless you specifically state it on each payment. So for that reason I'd just go on standard because more money automatically goes to principal.

Wulfgar · September 2014

All I did with mine was consolidate them into a 20 year repayment term and with the low interest I have there is no incentive to pay them off early.

My thoughts is if you can handle the increase then go with it since you will repay the loans quicker.

vlagrl29 · September 2014

KatieCutie05 said:

All mine are on graduated too. But if your just going to pay more anyway then I would just put it on standard. Remember with student loans if u pay extra, all you are doing is prepaying interest.... None of it goes to principal unless you specifically state it on each payment. So for that reason I'd just go on standard because more money automatically goes to principal.

Unfortunately we can't afford the "standard" payment option which is why I've been on the graduated plan.

Xstatic3333 · September 2014

My loans are on the level extended plan, which in my case is my lowest possible payment. Now, I in no way intend to take the full 20 years to pay off the loans, but I like the low minimum payment because it gives me flexibility to snowball other debts or goals. Plus, I'm technically paid ahead right now so in an emergency-type situation I could skip a month. There's no reason you can't pay more any time you want. My loans are federal, and any extra does go to principle; they just extend your next payment date also. My servicer is one of the good ones, so they spell it all out for me pretty clearly.

cupcait927 · September 2014

I extended my graduated repayment plan with Sallie Mae. I was on a 4 year graduated plan, and the payment was going to up by $150 next month (to almost $300). I applied online to extended the lower payment by another 2 years (keeping the payment around what it is now) and I plan on paying extra whenever I can over the next two years before it's set to increase again.

brij2006 · September 2014

What about changing to the standard repayment now? Especially if you will pay more than the minimum anyways.

KatieCutie05 · September 2014

I'm sure it depends what type of loans you have and through who... I have all federal through sallie mae and dept of education (direct loan).

Every time i pay extra it just comes out of my next months payment. So i owe nothing the following month. If i still pay it next month then that counts as overpayment because nothing was due so it comes out of the following months payment. So essentially your still prepaying interest and principal (according to how your payments are normally allocated) If you want the extra to ALL to to principal instead of taking X amount out for interest - you have to tell them. I've always just had to not pay it just to get current again.

Even my car payment is like that too as i discovered the hard way. I had to skip a payment and then make that regular payment as a "principal only" just to get it current. Its a pain in the butt... i sware they set these things up to encourage you to not pay it off early.

OP i would stick to your graduated plan until you can afford standard and just pay the minimum and then make a separate "principal only" payment

Xstatic3333 · September 2014

KatieCutie05 said:

I'm sure it depends what type of loans you have and through who... I have all federal through sallie mae and dept of education (direct loan).

Every time i pay extra it just comes out of my next months payment. So i owe nothing the following month. If i still pay it next month then that counts as overpayment because nothing was due so it comes out of the following months payment. So essentially your still prepaying interest and principal (according to how your payments are normally allocated) If you want the extra to ALL to to principal instead of taking X amount out for interest - you have to tell them. I've always just had to not pay it just to get current again.

Even my car payment is like that too as i discovered the hard way. I had to skip a payment and then make that regular payment as a "principal only" just to get it current. Its a pain in the butt... i sware they set these things up to encourage you to not pay it off early.

OP i would stick to your graduated plan until you can afford standard and just pay the minimum and then make a separate "principal only" payment

That's so irritating. I swear, Sallie Mae is a little bit sketchy. Once H called them with a question and when they transferred his call he ended up talking to a credit card company in China. Say what? They also refuse to acknowlege that extended repayment exists, even though we'd like to get him on that program as well so we can kill off our cars more quickly. He owes more than I do so I know he should qualify.

It sounds like you have a good system down but I have heard that some people have had success sending their servicer a letter stating that all overpayments should be directed towards the principal of the loan with the highest interest rate. Now with Sallie Mae I'm sure they'll make it difficult but legally it should be possible. I think car loans may be different; mine seems to have amortized all the interest right at the beginning, and doesn't even have "principal only" as a payment option like our mortgage does.

I'm with you, they're definitely trying trick everyone into not paying stuff off early. Financial penalties for early payoff are now illegal, so they just make it so confusing that most give up.

hoffse · September 2014

I don't know... I'm pretty sure H's Sallie Mae loans just have a box you can check to indicate whether you want extra payments to count against a future payment date or not - and if you say you don't want the extra payment to count against future payment dates, then it ends up going to principal. It's been awhile since I've done it, but I don't remember it being super hard - maybe just a little deceptive unless you read their instructions carefully.

Another way to do it is to save money separately until you have enough to pay off a loan in full - then request the payoff letter and do it all at once. Then your loans have only accrued interest through the current payoff date, rather than the payoff date 20 years from now. I've done that with a couple loans, and it's very straight forward.

H is on fixed extended - and we plan to pay them off in 7-8 years anyway, but that way we're not strapped in the case of an emergency.

brij2006 · September 2014

hoffse said:

I don't know... I'm pretty sure H's Sallie Mae loans just have a box you can check to indicate whether you want extra payments to count against a future payment date or not - and if you say you don't want the extra payment to count against future payment dates, then it ends up going to principal. It's been awhile since I've done it, but I don't remember it being super hard - maybe just a little deceptive unless you read their instructions carefully.

Another way to do it is to save money separately until you have enough to pay off a loan in full - then request the payoff letter and do it all at once. Then your loans have only accrued interest through the current payoff date, rather than the payoff date 20 years from now. I've done that with a couple loans, and it's very straight forward.

H is on fixed extended - and we plan to pay them off in 7-8 years anyway, but that way we're not strapped in the case of an emergency.

This. You do have to clarify it, but they do have the option to choose to make any extra payment be "principal only." I don't think I was able to do so on the website, but could when I mailed in payments. We are starting with the smallest and working our way up. So I've made sure to call in and get that days' payoff balance and made the payment with my checking over the phone. That way there isn't any few cents still charged to our account for the interest between when I called in and when they received our check.

vlagrl29 · September 2014

Is extended repayment different than graduated payments? My interest rate is fixed at 2.85% and I would always want to keep it at that. I had no idea that if you paid more it went to interest only. Good to know!

vlagrl29 · September 2014

we could focus more on paying it off earlier but not really at this time. I would rather put money towards retirement and savings.

brij2006 · September 2014

Then I would have them change it back to the standard repayment (assuming likely 10 or 15 year term) and pay it down that way. If/when your financial picture changes, then put extra toward it to get them finished up.

Have you looked at the terms in years for the graduated or extended repayment options? Usually those are in the 20+ year range, which just seems like forever and a lot of interest paid.

hoffse · September 2014

The options available will depend on the kind of loan you have. There are many categories.

H's are extended, fixed. Interest rate never changes, term is 25 years, but we can pay it off early. For his loans he had to have a combined $30,000 or more to be able to do the extended/fixed plan.

Having a 25-year loan doesn't mean you take 25 years to pay it off. For us it's just a way to lower our minimum monthly obligations in the event of an emergency. Plus it let us focus more strongly on one loan at a time since we aren't tying up a ton of money across all loans at once with a shorter term.

vlagrl29 · September 2014

After looking at all the options online I think I will stick with the graduated plan and pay more when we can. I would rather have a lower payment incase there are months we can't afford it, than have a bigger payment all the time. I will have to remember to make sure the extra goes towards the principal.

Xstatic3333 · September 2014

vlagrl29 said:
Is extended repayment different than graduated payments? My interest rate is fixed at 2.85% and I would always want to keep it at that. I had no idea that if you paid more it went to interest only. Good to know!

If you switch to level extended your interest rate won't change. Like @hoffse, I only use this to lower our minimum obligations, not to actually take 20 years. According to my current plan they'll be gone in 6 or 7. That said, there's a minimum amount you need to owe for it to even be an option.

Also, I'd really look into the extra payments going to future interest thing. It is definitely not the case for me. I frequently paid a little extra on my loan before I started focusing on our cars, and it would first go to any new interest that had accrued since the last payment (SL interest accrues daily) and then to principle. It also does move up my payment date when I get ahead, although I ignore that. I think the reason it moves up the date too is to encourage you to let more and more interest accrue, but the extra is still going to principle in my case.

hoffse · September 2014

Xstatic3333 said:

Is extended repayment different than graduated payments? My interest rate is fixed at 2.85% and I would always want to keep it at that. I had no idea that if you paid more it went to interest only. Good to know!
If you switch to level extended your interest rate won't change. Like @hoffse, I only use this to lower our minimum obligations, not to actually take 20 years. According to my current plan they'll be gone in 6 or 7. That said, there's a minimum amount you need to owe for it to even be an option. Also, I'd really look into the extra payments going to future interest thing. It is definitely not the case for me. I frequently paid a little extra on my loan before I started focusing on our cars, and it would first go to any new interest that had accrued since the last payment (SL interest accrues daily) and then to principle. It also does move up my payment date when I get ahead, although I ignore that. I think the reason it moves up the date too is to encourage you to let more and more interest accrue, but the extra is still going to principle in my case.

Yeah I think that's what always happens. Regular payments are amortized, but by paying ahead you are sending money primarily to principal.... they just "delay" your next due date unless you tell them otherwise.

I'm a big believer in autopay to make sure you are always paying at least the same amount each month, regardless of whether they have credited extra payments to future payments or not. Otherwise it's too easy to be like, "well, technically I owe $0 this month" and then suddenly you are no longer ahead - just "current."

abrewer5 · September 2014

Not to high-jack your thread, but I'm confused after reading some of the responses.

I just looked at my student loans and I'm paid ahead until December. I currently pay $150/month and my minimum is $130. Does this mean the extra $20 is going to future interest and not principle? It gives me a break down of how my payments are applied and how much goes to prinicple and interest. But I'm concerned that maybe I should be paying just the minimum and let the rest accure in savings over the year and then apply that payment as a principle only. WWMMD?

ETA: I set my payments up for auto-pay so I'm not sure if that changes anything

hoffse · September 2014

abrewer5 said: Not to high-jack your thread, but I'm confused after reading some of the responses. I just looked at my student loans and I'm paid ahead until December. I currently pay $150/month and my minimum is $130. Does this mean the extra $20 is going to future interest and not principle? It gives me a break down of how my payments are applied and how much goes to prinicple and interest. But I'm concerned that maybe I should be paying just the minimum and let the rest accure in savings over the year and then apply that payment as a principle only. WWMMD?

Any extra payments you make - unless you designate them as "principal only" - should go first to whatever interest has currently accrued since your last payment and then to principal. Practically, if you are making your minimum payments plus $20 all at once, then that $20 should go to principal because your regular $130 payment is covering interest that accrued since your last payment.

You are not paying for interest that hasn't accrued yet.

The confusing thing is that if you don't tell them that the extra payment is for principal only, lenders will "credit" it toward your future payments so that your account eventually shows a balance of $0 due. As long as you keep paying anyway, eventually the loan will be paid off. But lots of people stop making payments when they see that they don't owe anything that month - and then soon enough the account catches back up and they are no longer ahead. That's why I like to autopay the monthly minimum so that extra payments always keep me ahead.

But no, lenders should not be charging you for future interest. Check your accuont and make sure that isn't happening. You should only pay the interest that has actually accrued while the loan is active.

hoffse · September 2014

The other thing that confuses people is that lenders almost universally amortize loans so that interest is paid first. Most of your regular payments will be allocated to interest at the beginning of your loan according to the amortization schedule.

The couple times I've just saved separately and then paid off a small loan in one go it was really just because I had the money to do it and didn't want a $3,000 loan hanging around. In those instances I was current, and my little $50/month payments weren't making a dent in the principal because they were allocating it as though I would take the entire term to pay off the loan. When I requested the payoff letter, they added like 5 days of interest to the current balance, and then I paid it and it was done. So my final payment was like $3,000 of principal and $10 of interest, vs. my monthly payments which had been almost entirely interest since it was being amortized. But as you can see, they did not charge me for another 10 years of interest when I requested the payoff.

abrewer5 · September 2014

hoffse said:

The other thing that confuses people is that lenders almost universally amortize loans so that interest is paid first. Most of your regular payments will be allocated to interest at the beginning of your loan according to the amortization schedule.

The couple times I've just saved separately and then paid off a small loan in one go it was really just because I had the money to do it and didn't want a $3,000 loan hanging around. In those instances I was current, and my little $50/month payments weren't making a dent in the principal because they were allocating it as though I would take the entire term to pay off the loan. When I requested the payoff letter, they added like 5 days of interest to the current balance, and then I paid it and it was done. So my final payment was like $3,000 of principal and $10 of interest, vs. my monthly payments which had been almost entirely interest since it was being amortized. But as you can see, they did not charge me for another 10 years of interest when I requested the payoff.

Ah ok, makes a lot more sense now. That was confusing part from earlier in the thread that were charging the interest as if you wouldn't pay it off earlier. My principle is definitely going down, so I'll keep an eye on how much I'm accuring versus paying every month to make sure the extra amount is going to principle. Thanks for your help!

Which student loan repayment option is best?

Re: Which student loan repayment option is best?

Choose Another Board

Search Boards