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Student loan help for the Artist

WassermeloneWassermelone Registered User regular
edited October 2010 in Help / Advice Forum
So this is the lay of the land - there are four loans that total to:

11000 at 6.8%
5500 at 2.5%

The minimum payment is 200 aprox. What has scared us is that we've payed 1200 over four months and the loans total have only gone down about 500.

It would pretty much wipe out our savings, but should we just pay off the larger loan at the higher rate? It seems to me that we would lose more money paying off interest than we would make on the interest of a savings account.

I know this is pretty elementary, but in my defense I just woke up AND I went to art school where any math skills I once had died behind the studio in a pool of alizarin crimson paint.

Wassermelone on

Posts

  • WezoinWezoin Registered User regular
    edited October 2010
    Chances are you don't get 6.8% interest on your savings account, so I would dump as much money as I could onto it. There is something to be said for having cash available for emergencies, so maybe hold back a small savings (or if you have a credit card thats another good option as an emergency backup fund, and would allow you to dump all your savings into getting rid of the loan.)

    Depending on your bank its possible you're getting 2.5% or higher interest on your savings account (mine gets me 4% if I keep over $1000 in it, but my old one only got me something like 0.8%) If you get over 2.5% interest on your savings account then it would make sense financially to dump as much money into the 6.8% loan as possible, while paying the minimum payment on the 2.5%, and once the 6.8% loan is paid off continue to only pay the minimum payment on the 2.5% and hold the rest in your savings account (not that it would make thaaaat much of a difference)

    If you get less than 2.5% on your savings account, your strategy should be dumping as much money as you can into the 6.8% loan while making only minimum payments on the 2.5%, and then doing the same to the 2.5% loan.

    EDIT: Forgot to mention, make sure there isn't a fee for paying them off early first.

    Wezoin on
  • RUNN1NGMANRUNN1NGMAN Registered User regular
    edited October 2010
    Don't wipe out your savings to do this. Your savings account is for emergencies--it's not an income-earning account so comparing interest rates isn't really helpful.

    If you can put extra money towards your loan principle, that's great, but cleaning out your savings account just so you don't have loans to pay is not a good idea at all.

    Your loans are not bad at all. Don't be stressed about it. It can be annoying to look at a loan and realize how much you end up paying in interest, but you're getting something in return for paying that interest--namely paying over time.

    If you do decide to make extra payments, make sure the payments are applied to the principle, and not towards future payments (there's usually a check box on you bill to choose).

    RUNN1NGMAN on
  • WassermeloneWassermelone Registered User regular
    edited October 2010
    Hrmm.

    Two different directions of advice :P

    Runn1ngman - we would be fine in an emergency I think. We would be wiping out our savings account but not all of our savings. Why wouldn't (other than early payment fees? sheesh, I didnt even know those existed) we want to pay it off early? It seems like a poor investment when we would have more money just depositing what we would pay to the loans into a savings account over 6-10 years rather than paying the thing off over 6-10 years.

    Wassermelone on
  • WezoinWezoin Registered User regular
    edited October 2010
    If you have some free space on credit cards, I'd use them as your 'emergency fund'. I'm not saying you should trade out 6.8% debt for 20% (just guessing somewhere around there) credit card debt, just that chances are you won't need that emergency money. It's a risk, for sure, but as I see it its a matter of definately paying $748 a year in interest, or maybe paying $2200 a year in credit card interest (that would be the maximum risk, assuming an $11,000 emergency.)

    Basically, if you pay off the 6.8% loan the possible scenarios are:

    1) Save yourself $748 a year in interest
    or
    2) Have an emergency and cost yourself at most $1452 ($2200 cost on credit card minus the $748 saved by not paying interest on the other loan) a year in interest on a credit card

    It really all depends on how likely you think you are to have an emergency. The break even point on this, btw, is an emergency of $3740, at which point you'd be paying $748 per year in interest on a credit card.

    I don't know what kind of insurance coverage (health, auto, etc) that would reduce your need for emergency money, but I'm sure you can figure out how likely you are to need that much.

    Wezoin on
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