Strategy #2 - Exploit Payback Options

Whether or not the loan is consolidated, you should still be aware that there are quite a few ways in which you can pay back a loan. Let's go back to the hypothetical scenario of $50,000.00 borrowed. There are 2 schools of thought on how to handle this.

1) Minimum Payment - Pay Down Principal When Possible
If you are a disciplined person this might work well for you. Because the payments are lower ($418.22 per month) you will not have to come up with so much each month. This will give you a good chance at maintaining your credit rating. As well you will have a little more disposable cash in your pocket each month. I chose this option because I run my own business, so my monthly income fluctuates. Some months (such as most December & January) are points of low income. In such months, the low payment is greatly appreciated! However, when I have good months, I often pay down a larger than minimum payment (sometimes by 2 or 3 times). I am a very disciplined spender so this works for me. I will probably have my loans paid off in less than 10 years, but at least I have the option of a lower payment when needed.

2) Larger Payment - Shorter Term
If you have a fixed salary or you are a little less frugal than I am, then you might want to go this route. In the example above if you decided to go the 10 year route, your minimum monthly payment would be $606.64. If you can manage it, this option forces you pay a larger minimum, which allows you to pay your debt off faster - decreasing the interest greatly.

3) Larger Payment Up Front - Renegotiate - Smaller Payment Later
I know several people who did this, with great results. Basically, the idea is that when you first start paying the loan off, you do so over a short period. After paying for 5 years, you approach your lender and ask to re-negotiate the terms. At this point several things can happen. The best case scenario is that your credit is very good at this point (ie you haven’t missed or been late on any loan, credit card, car payments etc). Now you get a better rate (let's say for arguments sake 6.5%) which either shortens your term (if you keep the same payment) or lowers your payment over the final 5 years.

Here is an example:
First 5 Years your payment is $606.64. At this point you have paid off About $20,000.00 of the principal + $12,475.00 in interest.
Renegotiate at 6.5% for the remaining 5 years: Your Payment is $586.98. After 5 years, you pay off the remaining $30,000.00 in principal + about $5,200.00 in interest.
Total Paid $67,675.00.

If you look above, paying your 8% for the 10 years would cost you $72,796.56. By re-negotiating, you have saved approximately $5,100.00. Not bad for spending 1 hour in a bank and signing some papers. You don't have to wait till year 5 to do this. If after 2 years you have a good job & good credit, go ahead and try. You will save even more in the long run.

4) Larger Payment Up Front - Renegotiate - Longer Term Later
In this case you do much the same as above. However, after 5 years you re-negotiate your loan across a longer term. Let's say the situation is the same, and your better credit rating gets you a lower 6.5% rate.
Here is an example:
First 5 Years your payment is $606.64. At this point you have paid off about $20,000.00 of the principal + $12,475.00 in interest (You still owe $30,000.00).
Next Loan is over 10 years. Your payment is $340.00. After the 10 years, you pay off the remaining $30,000.00 in principal + about $10,877 in interest.
Total Paid $73,350.00. This is just a shade over the $72,796.56 that is in the 10 year example above.

This strategy is good for several types of people. Basically, you pay higher payments when you are young and single and much lower payments when you are starting a family, or have other obligations.

In summary, these payment strategies are really a function of how you want to live your life. For example, you might decide that what you want (or need) is to go with a 30 year term paying off as little as you can (about $330.00 / month). Your payment is smaller, your interest paid back is much larger ($82,077.62 to be exact) and maybe you are ok with that. Personally, the thought of paying back that much interest makes me sick. If you are like me, you will do whatever you can to lower it!

And remember, if you have good credit, and your student loan lender is unwilling to help you out in one of these strategies, find a bank that will - and buy out the remainder of the in terms that are more advantageous to you. You may have to pay a penalty of some kind (hopefully your loan isn't structured that way) but it may still be well worth it.

That's all for now. We will be posting a few more strategies over the next month or so as time permits. Please feel free to contact us if you have a strategy of your own. We would be glad to add it to our list.

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