Lowering Student Loan Payments to Tackle Other Debt

Probably the easiest loan to modify before (or after) falling on hard times is a student loan. Deferment and forbearance tend to be pretty simple options for when you fall on hard times, but what about the good times? If you’re on an aggressive plan to get yourself out of debt, the large payments combined with generously low interest rates (compared to most other debt) can be frustrating. What if you could lower the payments on your student loans to more reasonable amounts to free up some cash to tackle those higher interest debts?

Sallie Mae, for example, offers many different repayment options, including extended payment plans, 2 and 4 year interest only plans, and combination 2 and 4 year interest only extended plans. Since my debt payoff goal is 5 years, a 4 year plan would make the most sense in my situation.

The purpose of this excercise is purely psychological, as the most popular method of attacking debt is the debt snowball, which is of course not a mathematical but psychological approach. Lowering the large student loan payment frees up a large amount of cash to allow one to pay off smaller debts much, much quicker, regardless of their interest rates. The mathematical benefit is that those smaller debts have higher interest rates. The mathematical detriment is that you are effectively making no progress on the student loan debt, and in my case it actually makes my total combined interest paid higher than before. I suspect that some other people’s scenarios might see an overall reduction in interest payments, though, such as if a large, high interest car loan is involved (I’m thinking $15-20k @ 8-10%).

For my particular Sallie Mae loans, an interest-only payment would only be $83/mo, versus my current $215/mo. The tables below show the result of such an approach.

Debt Table 1

Debt Table 2

As is demonstrated, in the alternative method almost every debt is paid off within at most 3 months of the last one (far right column). All smaller debts are paid off several months in advance. For example, my LFCU loan, which is my highest interest rate, could be paid off 6 months sooner than before. At the very end, the snowball hits the Sallie Mae loan 6 months sooner as well, but still results in the same payoff date.

Overall, my total interest paid would be just under $200 more using this method, which I think would be a small price to pay for the huge benefits of taking such an action. What do you think? Has anyone else tried this, or even considered it?

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{ 1 comment… read it below or add one }

JudyC August 29, 2009 at 2344: I think $200 is a small price to pay for paying off some loans earlier. If I read your chart right, you will have paid off 7 loans instead of 5 by the end of 2010. I think that would give you a big psychological boost. It would me! You’ve made part of your goal. Also, just less headaches with less loans to juggle, missing a payment, making a late payment… I’ve never had to do this and hopefully never will, so I can’t give you advice based on experience. I used 0% credit cards and transferred balances until I paid them off. And somehow I (we) have a good credit rating.

Lowering Student Loan Payments to Tackle Other Debt

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