Today I’m going to talk about student loans, what different types of student loan consolidations are there? Which way is the fastest to pay it off? And what should you watch out for? When you get a student loan, it’s the best to get as much grants and scholarships as you can so that you don’t need to borrow money which you have to return.
The amount of money that you get is usually need-based, so if you have more scholarship, they’re going to reduce the amount of loan they’re going to give you. The kinds of loan that you get are divided into different kinds, this first three are actually federal loans, which means the federal government is lending it to you with a preferred rate.
It’s a little less than what you would get in a normal loan, this PLUS loan here you see it’s about 7.21% here in 2016. Now the subsidized means that the federal government is going to pay that interest for you while you’re going to school, so you won’t accrue any interest during that time.
Unsubsidized means the federal government isn’t going to pay that interest for you, so during your schooling, it’s going to keep on adding money to it. So if you borrow $10,000 and it’s 4.66% every single year, it’s going to add 460 dollars to the principal. So it’s going to keep on building up by the end of four years of going College is going to add another two thousand dollars to your principal, which you still have to pay back.
Now you can see that if you get a graduate degree, you don’t have any subsidized loans that they give you. I figure the federal government doesn’t want to subsidize you, once you go into graduate school, you’re going to make more money and stuff, so you have a better ability to pay it back.
They’re not going to help you that much on there, but they still give this unsubsidized one at a slightly preferred rate for you, 6.21% versus the loans, which is one percent higher. I think it’ll be helpful if I talk to you about my student loan, how I got my interest rate down and how I paid it off.
The only thing I regret is paying too much interest on it, I should have paid it off a little earlier, because I had the money to pay it off, but I held off from paying it for a couple of years, so the initial bulk amount I owe was about 40k plus another 8 K and 5% loan of the interest rate in the bank.
So in a way, I should have been keeping all that money in the bank, instead of paying this loan off , which is what I did, but that didn’t last for very long, I lasted for a couple of years initially. The federal subsidized loan I had was 3% now, you can still do this, which is set up auto payments that will automatically reduce your rate by a quarter percent.
If you do it from the very beginning, over ten years, it is a lot of money. So on top of that, I had 36 months of on-time payments, which is three years’ worth and after this three years of on-time payments, they reduce your interest rate by another 1%, so at the end of three years, I had an interest rate of 1.75%, much lower than the current interest rate. So it’s better to hold on to money in an interest-banking savings account, then pay this off.
But what happened later on is that the interest rate kept on going down, which made it a better deal to pay off the loan instead of keeping that money in the bank. When I finally paid it off, I saw that I paid actually about $8,000 of interest, which didn’t make me feel good, because $8,000 could have been in my pocket, roughly about half of this was offset by interest rate accruals.
So I only paid 4 K, so what I would tell myself or the students who are graduating now is to pay it off a little bit earlier, if you get this 3.41% after all these fancy deductions, the interest rate in the bank account is still one percent, so I suggest you paying off your student loan as fast as possible.
Now you weigh this again, saving money for buying a house or to pad your emergency fund. So based on that, you have to weigh on how important it is to save up as soon as possible, in order to get a down payment for a house. Now when you graduate, you’re going to have a lot of little different loans, subsidized, unsubsidized and many others, and they all require a certain small amount of payment.
But when you add it all up, it’s going to be significant. They’re going to offer you a way to consolidate all these into one single loan so that you can just have one single payment. The thing is if you consolidate with separate lenders, it’s like that lenders are taking a whole bunch of money and paying off all your federal loans, so all of it is paid off in the point of view of the federal government.
When that happens, you can no longer use the federal forgiveness program, if you anticipate that, it’s going to be rocky, maybe you want to drag it out and then see if you can qualify this forgiveness program, then maybe you don’t want to consolidate. However, if you decide to consolidate with separate lenders you can get a lower interest rate by consolidating over the life of the loan, you can actually pay a lot less interest rate if you consolidate, like a thousand.
Now let’s talk about tax deductions. Student loan interest payments, the interest part that you’re paying back only is tax deduction. Now tax deduction sounds great because it sounds like you’re getting deducted, getting free money. But that’s not the case, all you’re getting is reduction in the interest rate that you’re getting.
Let me show you in a simplistic way. What do I mean? If your interest rate is 4.66%, you are in a 25% tax bracket, you can write up to $2,500 of interest payments into your student loan, you can write off the full amount up to a sixty five thousand of income. However, it starts to phase out as you make more and more.
And if you make more than eighty thousand, you cannot deduct student loan interest payments at all. If you’re under 65 thousand and you’re in the 25% tax bracket, that means that you can reduce your income by that much and you don’t have to pay taxes on that amount.
If your student loan is 4.66% and you’re in the 25% tax bracket, for that amount of interest, you don’t have to pay any taxes on, at the end of the year, your taxes are reduced by that amount, so you can see your interest rate going down by 25%.
So your real interest rate that you’re paying into your student loan is 3.459%, so you see that you’re still paying money in the form of interest to your loan. The average student has a student loan of thirty thousand and if the project is five years and let’s do a simple straight multiplication.
3.5% through 30 thousand over five years, it’s about five thousand dollars worth of interest. And this is after taking your tax deduction into consideration, so it makes sense to pay this off as soon as possible. Because over five years, you’re going to pay five thousand dollars worth of interest.
What can you do with five thousand dollars in five years? If you happen to consolidate the numbers work out a little differently, you’re going to subtract 1.25% from your interest rate. It’s going to be 3.41%, you multiply it by 0.75 to take into account your tax deduction, it’s going to be 2.558%.
The effective interest rate that you’re paying into this loan is 30 thousand on average of student loan, you multiply it by 2.558%, you are still paying about three thousand dollars, you whittle it down and pay into your student loan as fast as you can in order to avoid these interest payments.
Now people say the interest rate that you get on the student loan is probably the best that you’ll ever get, it is good because if you have credit card loans or something or car loans, it’s going to be higher than that. You should definitely prioritize to pay off things higher than this, but if you happen to have everything else paid off and you got this left, you still need to pay into it, just to get rid of this loan.
Now you’re going to have other loans that have higher interest rate which are also student loans. And if you happen to have other separate little loans which have higher interest rate, you should just pay the minimum on the lower interest rate ones and pay off the higher interest rate with all of your extra cash.
In order to have extra cash to pay into these loans, you need to be able to be working. If you’re not working, you’re not making any money, therefore, you cannot pay into the loans, you not only need to be working, but also spending less than what you make outside after you graduate.
I have this other video on cash flow, you should check that out. If you’re interested, that would allow you to maximize your cash flow so that you are saving the most instead of paying off your loans the most, that’s all I have.
I hope this video helps you understand a little bit more about student loans and helps you pay back your student loan as fast as possible. Don’t forget to give me a like over here, comment and subscribe down here, let me know if this article helps you. Thanks for reading.