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Congrats on the progress! Waiting for the big happy dance....

AJ
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I've got about $36,000 in Stafford Loans at 3.75% fixed interest rate. i;ve been paying on the graduated repayment plan for a few years now, and have recently had a windfall that my wife and I would like to use to pay down the loan by about $6000. If I pay down the loan, then change my payment plan, will the new payment amount be based on my original loan amount and the start date of repayment, or will it be based on the paid down balance and the number of years that are left on the loan?

You need to pull out your graduated payment agreement or ask your servicer.

In general, the reamortization of the loan would be based on the remaining time on the loan, the interest rate, and the remaining principal. However, with graduated repayment plans, there are adjustments that are made to bump the payment up over time, and there are restrictions on how much/how little the payment can be in comparison to what the standard payment would be.

The specifics of how much the payment will be should be included in the information you got when you signed up for the graduated repayment plan. If you don't have the information any more, then your best bet is to ask the servicer.

I've been paying more than required most months for the past few years, but my graduated repayment plan is about to move to the next tier. My gut is to keep the windfall so that when the repayment bumps up a notch, I've got extra funds to cover it, Wife strongly prefers to get the debt smaller. Wife is currently raising young kids, but should be contributing to the household income more in about 30 months.

Once you pay the money into a student loan, you can't ever get it back out (with a mortgage, you may be able to refi or get a HELOC - not so with student loans), so it's riskier to pay the loan down without paying it off. At 3.75%, it's a relatively low rate, and the extra $6,000 principal pay down will only save you $225 a year. If you assume you can earn 1% on the $6,000 in your savings account, your next cost will be $165 per year until your loan is paid down to the point where the $6,000 (plus whatever interest is earned) will actually pay off the student loan.

AJ
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AJ,

Thanks for the comments. I'll get with my servicer on the scenarios.

regarding putting the money to work in some other fashion, I think its a good idea, particularly since I think I can beat 3.75% on that money over the long term. However, its a joint decision between me and my DH, and its pretty important to to pay off the student loan.... We are trying to follow a Dave Ramsey type snowball which suggests pay off your smallest debt first. The whole thing is kinda funny to me because they are my loans, and in my name..
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regarding putting the money to work in some other fashion, I think its a good idea, particularly since I think I can beat 3.75% on that money over the long term.

I'm not even saying that you should necessarily 'put the money to work in some other fashion'. What I am saying is, with a 3.75% interest cost and a 1% interest rate on your savings, it costs you little to put the money that you would have used to pay down the loan into a savings account, and buys you a lot of flexibility in terms of having additional liquidity in case of any emergencies. With low rate installment loans, it's not generally a good idea to make large lump sum payments, since it's difficult to get the money back again under the same terms, if you can get it back at all.

However, its a joint decision between me and my DH, and its pretty important to to pay off the student loan.... We are trying to follow a Dave Ramsey type snowball which suggests pay off your smallest debt first.

Well, if a $36k student loan at 3.75% is your 'smallest' debt and your only other debt is your (preumably larger) mortgage at 4.875%, then I'm not so sure I'd be so worried about getting the debt down 'quickly'. Unless you have lots of spare cashflow, it's going to be a long haul, multi-year paydown. Trying to take a 'sprint' attitude against that type of debt is probably going to lead to frustration, even if you are making great progress.

However, I probably would recommend choosing a time frame that you want to have the student loan paid down to the savings account balance, then start making payments at that level, instead of your graduated repayment level. For instance, if you want to pay the student loan off in 5 years, you put the $6000 into a savings account now, make payments of $560 a month to the student loan, and in 60 months, you should have enough money in your savings to pay off the loan completely.

If you want to pay off the loan more quickly than that, the payments would need to be larger:

A $600/month payment would allow you to pay off the loan with your savings in about 56 months

A $700/month payment would allow you to pay off the loan with your savings in about 47 months

An $800/month payment would allow you to pay off the loan with your savings in about 40 months

And if you were able to make $1000/month payments, you would have enough in your savings to pay off the loan in 32 months

AJ
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And just for comparison points:

Paying the $6,000 toward the loan now and making those same payments:

$560/month payment - paid off in 59 months

$600/month payment - paid off in 55 months

$700/month payment - paid off in 46 months

$800/month payment - paid off in 40 months

$1000/month payment - paid off in 32 months

So, as you can see, paying the lump sum down now vs. putting it in a savings account doesn't really buy you that much.

AJ
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Follow up

Never changed plans down to about $22000 on the student loans still paying a bit more than required As noted when the new graduated paymentioned is calculated it's based on the current amount. The result has been very little rise in the graduated repayment

The approach has ultimately resulted in flexibility as when money was occasionally tight I could pay the minimum
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I've continued to pay down extra over the years - at the present time, I'm making essentially a a double payment every month, and will be paid off at the end of April 2020. That will pay off my loans in about 15 years.

A few other notes for posterity:

DW never has reentered the workforce in a meaningful way, but continues to work some, maintain a professional license, and do her best to take care of kids.

I do have some debt other than the student loans:

$3000 @ 0% on a credit card (goes to normal rate in August), planned pay off by May 2020.
$15,500 @ 0% on a car. We are not underwater at this point, but will snowball into paying this off quickly, with a target of paying it off in July 2021
$57,000 @ 4.125% on a mortgage, to be snowballed after the car is paid off.

We are maxing out my 401k, contributing to IRA, and making contributions to regular (taxable) investment accounts.

The student loans were a bit overwhelming when I graduated, a pain in 2011 when this thread first started, and an annoyance over the last few years as my income climbed. I am glad that I got a science degree for my BS that was broadly useful in a number of decent paying work environments, and I'm even happier with with getting my advanced degrees. Student loans gave me some opportunities I don't think I would have realized without them. I also really appreciate the posters here at MF that have helped me analyze paying down debt and making investments in a prudent fashion.
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Congrats on the progress! Waiting for the big happy dance....

AJ
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