When I was in undergrad, my parents were struggling with money. I made the choice to design my path to help me graduate early and save them a semester of payments. Now that I’m an adult and through grad school, they want to return that favor and pay off one of my student loans. I have two choices.
Option A: $16.8K remaining, 5.03% interest rate, monthly payment set at $300 a month
Option B: $15.3K remaining, 4.84% interest rate, monthly payment set at $500 a month
To me, option A seems like the no brainer – it’s more money outstanding and it has a higher interest rate. However, we just had a kid and my wife is off work for a while to raise our kid. I’ve had a couple people tell me to pay off Option B so it feels like I get $500 bucks back in my pocket instead of $300 every month. We’re going to be living tight for a while but we have strong savings. Am I correct in choosing to pay off Option A for maximum financial benefit?
Sanity Check on Loan Choice
byu/GrouchyOldMan93 inpersonalfinance
Posted by GrouchyOldMan93
3 Comments
I am hung up on the fact that your parents paid for your undergraduate degree but still apparently feel they owe you tens of thousands of dollars
Are they planning on (1) paying off in full, or (2) assuming your monthly payments?
If #1, do negotiate first about your liquidation options. You can get huge discounts that might change the picture and might even almost pay both fully for the price of one. Then you choose the most financially favorable, as the difference will be noticeable.
If #2, Option A is mathematically best. But not by that much, so you should consider: will $200 on top of $300 make a huge difference on your budget? How are your savings, cover months of expenses? What will you do with the money left over? How tight are things now and how long will your wife stay at home?
Also, are both loans private? If so, the will certainly negotiate and accept up to 40% discount. If not, usually holding the federal one is more beneficial as it might eventually be forgiven or have negotiations available as well.
Using a quick online calculator for those payment schedules…Option A will take you twice as long and cost you an extra grand in interest.
Paying off B may look appealing, but if you keep it you’ll finish and have 500/mo in your pocket much sooner