Student (or any other) Loans

You have a large student (or any other loan) looming over your head and you want to know how to pay that off. Look at the Bank Rate Amortization Schedule to determine what you need to add every month to pay the loan off sooner.

As an example, let's take the left overs of my private loan of $11,676 at 164 months, 6.25% interest. Select the mortgage start date to be the due date of your loan and the last month you paid it on. I am selecting Feb 24th. The calculated monthly payment is $106.05 (which is a few cents off my actual minimum payment). My pay off date is Oct. 24th 2024. If I double my payment to $212.10, my pay off date changes to Aug 24th 2016. That is in 5 years instead of 13.

You can play around with the numbers to see how much extra money you have left in the budget to see how much extra you can pay towards your loan and what is the difference that it will make on the life of your loan. I am planning to add $200 to my monthly payments, which allows my loan to be paid off in 3 years instead of 13. I am going to pay $1,374.99 in interest vs. $5,716.64 if I kept paying the regular payment amounts. This is a saving of $4,341.65.

Many people say that you should not pay off your student loans any sooner than you have to due to the tax deductible interest. If those experts can prove that I will gain a tax break of $4,341.65, then I will change my strategy and stop paying extra on my loan. However, I don't think they can. I paid $1,427.37 on this loan in interest last year, which, at 15% tax rate, means I saved $214.11 in taxes. If I save this much every year, which I won't, as the interest you pay decreases every year, then I will save $2,783.37 in taxes over the next 13 years. This number is lower than what I can save in interest if I make the extra payments and I will have a tax break for the next 3 years as I pay this loan down.

The only factor that might change this number is when I move to the 25% tax bracket. If I moved to the 25% tax bracket starting next year, I would save $4,638.95 in taxes, which is more than the savings in interest, however, remember that the interest you pay will significantly lower as the years go on, and, therefore, you would still be saving less in taxes than in the interest. Also, this assumes that I will be moving to that tax bracket this year.  Also, this calculation does not account for what interest I could be earning on the extra $306.05/month that I would have freed up starting in year 4.

Bottom line - you save more by paying down your debt earlier than you do in tax breaks from paying the interest.