Student Loan question

[mui1080]

Hi guys. Thank you for any input.

I currently have two student loan that are in repayment.

Federal $7052 @ 6.8 % $80.52 (Subsidized)
Sallie Mae $7300 @2.7 % $117.93 (unsubsidized)

I will be going back to school this semester so both loans will be automatically deferred, however I still would like to make payments on my loans.

My question is which loan should I make payments on?

Sallie Mae has the least interest, but it is an unsubsidized loan so interest accumulates and capitalizes during deferment. This will increase my payment even more than the current $117.93 per month, which is a stretch for me now.

Federal loan is subsidized so I won't pay any interest when it is deferred, but during repayment period I pay the most interest on this loan per month.

I am planning to apply all of my payments to one loan but I'm not sure which one will allow me to payoff sooner with the least amount of accumulated interest.

[moneywhisperer]

Pay Interest only on the unsub while you are back in school - that way it doesn't capitalize into the loan.

[phil5185]

I wouldn't prepay either one. The Fed loan gives you free use of that money while you are in school, ie zero interest costs. And the Sallie Mae gives you very cheap use of money - the 2.7% adds only $200/yr to your $7300, that also provides very inexpensive use of $7300.

[thyme4change]

I probably wouldn't pay either - but if I was forced to choose, I would pay the one with the higher interest rate. If you capitalize interest into the unsubsidized, that is $197 per year - but the difference in interest paid on 6.8% v 2.7% is $290 - so if you are able to pay that down you might save more over the life of the loans. But, at those rates, I would probably put the money into savings and make sure nothing funky comes up, and then after graduation you can decide if you want to make a large lump sum payment to reduce the subsidized loan.

[DVM gone riding]

if you re-consolidate after school the federal int rate might go down and it is free while in school so I wouldn't prepay on that.
I would pay enough on the Sallie Mae not to have int added into the loan-but I can't stand the idea of paying interest on interest. IF you are continuing to borrow I wouldn't prepay either I would simply borrow less.

[haapai]

Your situation is very interesting (lots of moving parts) but I'm afraid that I can't answer the straight up or down question that you have asked.

It's not clear from your post whether you are borrowing to go to school this semester or how long your deferment will last. If you are taking out new loans, I'd definitely argue for borrowing less and boning up on how to refuse part of a Stafford loan or return a loan that has already been disbursed.

Your post does not mention whether the 2.7% loan was ever consolidated.

It's hard to argue for making payments on either loan while in deferment. The 6.8% subsidized loan isn't charging you interest. The 2.7% unsubsidized is charging interest, but that rate is so low that making unnecessary payments is madness and it's hard to argue for even paying the quarterly interest.

FWIW, adding $64 (approximately 4 months interest) to the balance of the unsubsidized loan will increase the remaining 66 payments by about $1.05 each.

It's never been entirely clear to me what happens if you make unnecessary payments to principal during a deferment period. In theory, this should result in a recalculated (reduced) payment, but I've never heard anyone confirm this.

If you don't have any new loans, I'd argue for making the interest payments on the unsubsidized 2.7% loan and saving up the rest to make a lump-sum payment on the subsidized 6.8% loan right before the deferment ends.

[haapai]

For what it is worth, if the older, unsubsidized Stafford isn't consolidated, you really have some interesting options to consider.

[Urban Chicago]

First, I believe the unsub should be consolidated, if it has not been already.

Second, I'm with the posters who argue for not prepaying and borrowing less this time around.

However, if you can get through school without adding to your debt AND by prepaying, prepay the sub first as it pencils out to save you more in the long run, assuming your program isn't a 12 year PhD or something.