Take out SL at 3.4% to pay off SL at 5%?

[midjd]

Just wanted to run the numbers past this group to make sure I'm not missing anything important

I have a private SL at 5% interest, $14K balance, payments about $190/month ($510 due quarterly). It will be fully paid in February 2020.

DH is currently going to community college to get his A.A.S. in auto technology. We've been paying out of pocket up to this point (he has a summer and 2 semesters left). But the 2011-2012 Stafford rates seem too good to pass up, at least on the subsidized portion. I'm thinking we could max the subsidized loans for 2011-2012, which would be $4,500, and throw it at my SL, since 3.4% (0% until August 2012) is better than 5%, right? Or is 5% an interest rate that shouldn't be prepaid? Where's Phil?

[formerexpat]

I'd take the Stafford at 3.4% and KEEP the 5% loan.

Are you able to deduct SL interest still [i.e. is your AGI under $110-140k]? If so, you're effectively paying 3.75% for the 5% debt and would be paying 2.55% for the 3.4% debt after tax deduction impact.

There is no reason for you to pay as you go when you've got 3.4% credit available to you that you can pay back over the next 10-15 years. Inflation will eat into the PV of that balance so fast. Invest that money for 30 years at 10% per annum [average return - not every year].

[haapai]

The first thing that jumps out at me is that your debt gets paid off and debt in your husband's name increases. How much does your husband trust you?

Is he planning on going farther than his AAS? There are some limits on how much one can borrow as an undergraduate and over a lifetime. Will taking out these loans cause him to bump up against them?

On the other hand, swapping 5% variable for 3.4% fixed with much better hardship provisions and in the opposite spouse's name sounds like a great idea.

How will throwing an extra $4500ish in extra principal payments at the private loan affect your monthly payments and when?

I'll look up the current fees associated with taking out Staffords on my own. At one point, Stafford loans had origination fees of 3% or so built into them, but I think those fees have been phased out by now.

finaid.org has a nice EFC guestimator. Running your numbers through it might tell you something about how much you and your husband will be expected to contribute and whether you will qualify for subsidized Staffords.

[midjd]

Thanks for the responses. Expat, I didn't really think about the tax considerations. We are below $110K AGI (and probably will be for the next few years), so can still deduct interest. I was vacillating about prepaying a 5% loan (our mortgage is 4.75% and that seems dirt-cheap to me) but the 3.4% rate made the 5% look so high and scary in comparison...

Haapai, good point about the debt switching names. But DH trusts me, we have a pretty solid relationship. He has no desire to get a bachelor's... he is truly in it for the education, not the degree. He just wants the skills to be able to fix cars and be paid for it He also declared BK about 4 years ago and has essentially zero credit (other than some utility bills in his name) so it would probably be good to have at least one open loan that he could use to reestablish his credit. (His score is around 655, according to Credit Karma - not sure how accurate it is).

We will have to run the numbers to see what DH qualifies for - he did fill out the FAFSA for 2010-11 and was eligible for about $4K (half subsidized, half unsubsidized). Kicking myself now for not taking it, the subsidized was 4.5%. I will also run the numbers to see what a prepayment will do to my monthly SL obligation - probably not worth it if I'm just going to save $30 or $40 a month.

[Deleted]

Even without those rates, i'd generally switch a private loan for a federal...

[DVM gone riding]

don't stafford loans still have origination fees or have those gone away, if I remember correctly it was like 3% once upon a time but maybe they went bye bye when the DOE took over -by the way I HATE the DOE at this point 10x worse then dealing with Sally Mae.

If there is an origination fee I wouldn't do it, otherwise I would.

[Deleted]

There is a loan fee on all Direct Subsidized and Unsubsidized Loans. The loan fee is a percentage of the amount of each loan you receive. For loans first disbursed between July 1, 2010 and June 30, 2011 the loan fee is 1.0%. We will deduct the loan fee proportionately from each loan disbursement. The specific loan fee that you are charged will be reflected in a disclosure statement that we send to you.


from fafsa.ed.gov From what i saw other places, it was 4% a few years ago, but dropped gradually to 1%...

[973beachbum]

I have a question about your SL. You said it is private and at 5% interest, but I have never heard of a fixed rate private SL. Is it a variable interest rate SL? That is what most private SL's are although some have a fixed rate for a certian period of time.

Personally I don't like private SL's. I would change it for that reason alone but if it is a variable interest rate one it would be a no brainer to me. I would make the switch.

[midjd]

Hi Beachbum... it seems to be fixed at 5%, 10-year term (it was a need-based loan from the school, maybe that's why?) Variable would scare me to death!

Oped, thanks for the info on the loan fee - 1% doesn't seem too bad. I think it was 3% when I took out my Staffords.

[haapai]

It sounds like you have a Perkins loan, which is a type of federal loan, not a private student loan.

Since the interest rate is fixed, making extra payments may or may not have any effect on the monthly payments. You'll have to do some research to find out.

It probably has some hardship and deferment options that are quite similar to Staffords. I also believe that it can be consolidated along with a Stafford loan. (This was a much more interesting option back when Staffords were variable-rate.)

I rather disliked my Perkins loan because it had to be paid by check to the university. It was inconvenient and I couldn't check my account balance online.

A small Stafford loan paid automatically sounds like a good way of generating some positive credit history for your husband.

[dianartemis]

May 4, 2011 20:37:09 GMT -5 formerexpat said:

I'd take the Stafford at 3.4% and KEEP the 5% loan.

Are you able to deduct SL interest still [i.e. is your AGI under $110-140k]? If so, you're effectively paying 3.75% for the 5% debt and would be paying 2.55% for the 3.4% debt after tax deduction impact.

There is no reason for you to pay as you go when you've got 3.4% credit available to you that you can pay back over the next 10-15 years. Inflation will eat into the PV of that balance so fast. Invest that money for 30 years at 10% per annum [average return - not every year].

I know that's english and it should make sense, but must be too early in the morning. It looks like goobledeegook.

[phil5185]

Or is 5% an interest rate that shouldn't be prepaid? Where's Phil?

I would take them both - ie, keep the 5% and take the 3.4% loan. Fixed rate 5% longterm capital is a good deal, you can direct your own money into investments elsewhere.

[haapai]

For what it is worth, if you have a Perkins loan, you may be able to consolidate it (with or without a Stafford loan) and extend out the repayment period. The one-eighth of a point rounding might not be the problem that you think. The new loan will probably have the quarter-point discount for electronic payment feature that the Perkins loan does not currently have. That should offset the rounding up somewhat.

I've modified this post to remove the suggestion that a Perkins loan has to be combined with another federal loan in order to consolidate and extend out the repayment period. If I understand correctly, you should be able to consolidate a $14,000 Perkins loan with a 5% rate and a 10-year repayment period and land up with a $14,000 federal consolidation loan with a 5.125% nominal rate and a .25% electronic payment discount and a 15 year repayment period.

[Deleted]

I'd use the 3.4% SL rate to pay off the 5%. Even with the origination fee it would worth it and your a 0% time as well and it can help your husband's credit score.