What’s the best way to use 20,000?: Student loan repayment?
October 18, 2010 by admin
Filed under Student loans
I am getting 20K from the Indian Health Service to help me pay back my Student loans, because I work in a rural indian health center. They make a direct deposit to me – I have about 130K in loans to pay back. As long as I have qualifying loans I can reapply each year for another 20K. If I send the money directly to the loaner and take 20K off the top, my monthly payment will only reduce about $150/mo if I’m lucky. If I bank the 20K instead and use it for monthly payments of say, $1500/mo then I could keep what is NOW coming out of pocket ($850/mo) to increase my personal income – which is desperately needed. So, bottom line there is I would be increasing my payments by 650/mo. Question is, would this be better for me or worse in the long run due to compound interest rates? $150/mo decrease in monthly payments with 20K off the top of 130K owed. OR bank the 20K and increase monthly payments 650/mo. HELP! My loans range from 8% for state loans (80K) and 3-4% federal loans 50K. HELP!
Whatever blows your skirt up
Have you asked the loan company what the impact of an lump sum principal only payment would be? I would be afraid that if i held on to it I would spend it on something else. If you make a principal only payment you would be reducing the amount of interest you would be paying for the life of the loan.
It would probably be best if you put the money toward paying off your loan with the highest interest rate. Once you have made that payment, you may be able to renegotiate your monthly payments. You may also consider using half of the money to pay off loans and the other half for monthly payments.
Bank the money that you will need for the immediate future – potentially until you get the next 20k – and use the rest to pay off the 8% state loan (start w/ the highest interest rate first).
From the money you bank, consider a money market fund or CD to get a higher rate on those funds, but make sure you keep enough available to meet expenses
Federal loans at 3% are almost like free money, but 8% is more than you can reasonably expect from investment vehicles. Also, you may want to look at a consolidation that would allow you to stretch out the repayment term – which would lower your monthly payments.
If you do consolidate, consolidate the high and low interest ones seperately to allow you to pay off the high interest ones sooner.
Typically student loan repayments have low interest rates. If you can lock in a guaranteed rate better than that by investing the $20K, you will be able to pocket the difference. See a Financial Advisor.