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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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