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Hello, Fools.

I'm new to the forum, so I'm hoping that this is the right place to put my query. I have spent the past 9 months or so Foolishly arranging my personal finances and for the most part, have been successful. The one exception is, as you may guess by the subject line, my student loans. I spent four years at 'Wise Man medical school' which has left me with six figure loan debt, certainly nothing that I can hope to wipe out within the next 5 years. The only good aspect of my loans is that the interest was low (all in the range of 5 to 8%) and mostly deferred until a few years after graduation.

My question is this: Should I plod through and pay off the loans on schedule, which will take about 9 more years and eat up 25% of my net income, or should I consolidate and (Foolishly) invest the difference? I can consolidate all of them into a new rate of 6.6% and cut my monthly loan payments to about 13% of my net take home pay. Of course, the total repayment lengthens, to about 30 years, and the total amount I pay over the course of the loan would increase by 120%. I know that every situation is different, but if any Fools out there have personal experience or advice it would be greatly appreciated.
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I consolidated student loans for both undergrad and law school over a 25 year period, never intending to take that long to pay them off. I am now 12 years out of law school and still paying. As I've stated before on this message board, I wish I had just bitten the bullet and paid them off as soon as possible. You will need to do the math yourself but it seems to me that it would make good financial sense to pay the loans down now. In 9 years you will be debt free and able to invest all your money after that point.

Just my 2 cents.
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jshoshara: "I'm new to the forum, so I'm hoping that this is the right place to put my query. I have spent the past 9 months or so Foolishly arranging my personal finances and for the most part, have been successful. The one exception is, as you may guess by the subject line, my student loans. I spent four years at 'Wise Man medical school' which has left me with six figure loan debt, certainly nothing that I can hope to wipe out within the next 5 years. The only good aspect of my loans is that the interest was low (all in the range of 5 to 8%) and mostly deferred until a few years after graduation.

My question is this: Should I plod through and pay off the loans on schedule, which will take about 9 more years and eat up 25% of my net income, or should I consolidate and (Foolishly) invest the difference? I can consolidate all of them into a new rate of 6.6% and cut my monthly loan payments to about 13% of my net take home pay. Of course, the total repayment lengthens, to about 30 years, and the total amount I pay over the course of the loan would increase by 120%. I know that every situation is different, but if any Fools out there have personal experience or advice it would be greatly appreciated."


My two cents, FWIW: I would not consolidate any loan with a low rate into a higher rate consolifation loan; why give up the good rate?

Second, even if I consolidated, I would be very reluctant to increase the terms of the loan substantially; as you noted, the total cost of the borrowing increases exponentially. One exception, might be to manage your cash flow through internship, residency and any post-residncy fellowships, but beyond that I owuld be reluctant. Do you really want to still be paying for your education when you are 52?

The counter-position is based on the idea that you can invest for a greater after-tax return than the cost of the loan. How could is your actual investment experience? Also, do not be fooled by the last five years, which have been one of the greatest bull markets of the last 50 years.

To really run the numbers, you will need to consturct a spreadsheet and model the alternatives under different scenarios. If you keep the existing loans in place, then in 9 years you would have no student debt and could invest 25% or more of your net income on a going forward basis. If you consolidate per your plan, you might start investing 12% of your net income (25% - 13%), assuming that you can maintain your disciplince and focus, but after 9 years, you would still be paying loans and investing 12% of net income instead of the 25% that paid off loans would allow you to do.

You also did not discuss your personal situation much and the likelihood of it changing? Are you already married with a house and two kids, so that expenses are more likely to remain "constant", or are you single, living in an apartment and more likely to get married and/or have children in the next 25 years (which may well change your budget dramatically); certainly there is no need to bare your soul on a public board, but these issues shoul be factored into the analysis. In addition, you did not mention your practice area and the possibility/probability of income substantially increasing in a few years, so that the current loans would then consume a much smaller percentage of net income.

Just my $0.02. Hope this helps. Regards, JAFO
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Is it possible for you you to make overpayments on the 6.6% consolidated loan and pay it off sooner, or are you locked in to that extended repayment period?

I'm paying down by sending in overpayments each month as my loan allows me to pay off at any time. I'm on a variable that runs between 7.5% and 8.25%. Just curious about that 6.6% rate you got and what the restrictions are.

I'm very much in the "pay it off" now camp, which is why I pay more each month. But, I know that may not work for everyone.

Don't forget, your student loan interest is deductable at tax time (up to $1,500). Every little bit helps.

Good luck.

FJG
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