What order to pay down student loans with forgiveness?
So, we are absolutely not at this point yet... we are able to save a whopping $0.90/mn IF we forego things like the kiddo's birthday/Christmas presents and the like. However, my brain is incorrigible and I just can't stop thinking about "ok, when we have enough to cover everything and have savings, what's the best way to pay down our student loans?"
Because of some very poor financial decisions in our college years and because of career changes (much better in quality of life, much worse financially) we managed to get ourselves $154k in student loan debt in addition to still owing $213k on our home. But no credit card debt at all, so there's that at least!
Here's the thing. About $130k of that student loan will be forgiven in 9 years. Another $13k will be forgiven in 24. All of these loans are federal, and we're on the Income Based Repayment (IBR) plan. This ended up meaning that we're not even paying enough to cover the interest on those loans, so at the rate we're going now, they will never be paid off until forgiven. The $130k consists of 6 different loans all combined into one payment, but with different interest rates, which range from 4.5% to 6.55%. The $13k is at 2.875%. Our mortgage is at 3.5% and we have 29 more years on it. One final loan, not federal, is about $9k at 5%. That one should be paid off in 7.7 years at the rate we're paying.
So here's the question: When we get to the point of paying off debt, do we start with the 6.55% loan since that's the highest interest, even though it will be forgiven? Or do we throw it at the 5% loan so it gets paid off sooner? And after that, do we throw the extra toward our mortgage at 3.5% and not bother with the 2.875% loan at all, since it won't be paid off before forgiveness in 24 years (unless we pay off the mortgage before that)?
I'm not motivated by seeing things paid off, so the balances don't matter to me for doing a debt snowball. I'd rather do a debt avalanche and go from highest to lowest interest. I just don't know how to do that when you figure in the forgiveness. (And I don't feel guilty about having them forgiven, because they're still going to make more off of us than the original amounts.)
I would go after the 5% loan first, since that will never be forgiven. Go ahead and get it off your plate when you can, so that you can free up some cash flow on a monthly basis.
I may be mistaken, or simply on a different IBR plan than you all, but if your income increases in the coming years (statistically a very probable assumption), your monthly payments on the "forgivable" student loans will go up.
So for me, one of my federal student loan payment schedules looks like the figure below.
You're going to want to plan for that adjustment, at least. I would at least consider (depending on what your income outlook is in the coming years) ditching that 2.875% loan that will be forgiven in 24 years, because for me, I would not want to have that thing hanging around me for that long. If you pay it off sooner, I am thinking you are going to pay less paying it off than having it drawn out for 24 years. Don't ask me to do interest calculations, I just know that it majorly works against us when we are the ones paying it rather than earning it.
So maybe do an interest calculation on these: will I pay more if I pay the minimum until forgiveness or if I accelerate payments? I know there are people on these forums who can point you in the right direction on this stuff, it's just not me!
List debts largest to smallest and focus on the smallest one first.
Pay off the house last.
"I'm not motivated by seeing things paid off, so the balances don't matter to me for doing a debt snowball."
"When we get to the point of paying off debt"
What does motivate you to get out of debt?!?!
I think your thinking around the above statements needs to change because it sounds a bit ridiculous.
I understand we dont know your whole financial situation but if it where indeed an debt "avalanche" as you suggested the interest rates wouldnt matter because those debts would be gone FAST.
Can you work more? Work more.
Can you increase your salary? Increase it.
Can you sell stuff. Sell stuff?
Have cars? sell them and get cheaper ones.
You've probably heard it all before. But if you want it you'll get it.
And go buy the book "The Total Money Makeover".