Lump Sum Payment to Reduce Monthly Studnet Loan Bill

 Hello,

I am going to graduate from my Masters program in May. I have $30,000
in student loans with ACS. They project my monthly 10-year re-payment
to be $300 or so a month.

However, I have $15,000 of their money sitting in a high-interest
bearing account. I want to give them the $15,000, cut my debt in half,
and make my repayment around $150 a month.

But I'm worried because I've gone through this before. Last time I
wanted to do a lump sum payment, they refused to modify my monthly
payment. They just told me to make the lump sum payment, continue the
high monthly payment, and just pay the debt off in half the time.

I want to decrease my monthly payment, not the term of my loan. Anyone
have a clue how I can get them to do that?

Thanks,

Chris

 

This is a little confusing - why would you borrow $30,000 when all you
needed was $15,000?

No need to go into that really, the question is rhetorical.  Presumably,
what you want to do is reduce your monthly payment in order to reduce your
monthly outgo.  Usually, the way people do that is to refinance, and that's
essentially what you're trying to do.  If whoever holds the loan is
unwilling to do as you suggest, the "easy " thing to do is go out and borrow
$15,000 somewhere else on the terms you want, add the $15,000 you have in
that "high-interest bearing" account, pay off the student loan, and make
your monthly payments on the smaller, second loan.

The trick there is finding someone willing to lend you $15,000 for ten
years.  If you own a house, you could do a home equity loan, but other than
that I don't know of a source for such a loan offhand.

However, it seems to me that you're making this a little harder than you
need to - I probably wouldn't go to the trouble of arguing with whoever
holds the loan or looking for a new one.  If you take $150/month out of that
$15,000 account, it'll be 100 months before the account is exhausted even if
the account earns no interest.  In other words, you can make payments of
$150/month out of your current income for at least 8 years and 4 months
without doing anything at all, and you'd have to pay the full $300/month out
of current income for only 1 year and 8 months.  In 8 years, presumably
you'll find it much easier to afford that additional $150/month.

If the account earns interest, you can tap it longer.  If it earns 4%
(compounded monthly) after tax, you'll finish off the 10 years with $275
left in the account without ever having to pay more than $150/month from
current earnings.

When you're figuring out the pros and cons of this, remember that taxpayers
who have taken out student loans taken to pay the cost of attending an
eligible educational institution are generally eligible for a tax deduction
for the interest they pay on these loans.  The limit for 2006 is $2,500 and
you can take the deduction whether or not you itemize.  For single
taxpayers, the deduction is phased out for modified adjusted gross incomes
of $50,000 to $65,000.  The loan must have been used for qualified
educational expenses, so I'd guess that since half your loan did not go
toward such expenses, no more than half the interest would be deductible if
you qualify.

The point is that when you're figuring the after-tax earnings on the
account, don't forget to take the deduction into account.  It doesn't look
like a big deal in your case - assuming a 4% interest rate and drawing out
$150/month, in the first year you'd earn about $579 in interest, so I guess
the deduction would be just shy of $290.  However, I'm not a tax expert -
check for yourself.

Using the same rate of interest, you could make the entire $300 payment out
of the account for four and a half years before you had to contribute money
from current earnings to pay off the loan.  After that, you'd be on the hook
for the entire $300/month until the loan is paid off.

 wrldruler wrote:

One possible way is to threaten to leave.  If you can qualify for another
loan to refinance with, you won't be bluffing.  It's hard to dig up info
about them, but presumably ACS is a for-profit organization.  If so, they
make money off interest, and if you refinance, that is equivalent to
taking your business to a competitor.  If they believe you will really
do it, they may be willing to negotiate.

Another way is to actually refinance.  I don't know much about student
loans, but I presume you can refinance and get another loan with similar
terms, which includes low interest rates and tax-deductible status.  If
you can do that, it may be worthwhile.

Third option is this:  if the interest rate is low enough that you can
earn that much on your $15,000 after tax[1] in a low-risk, liquid
investment, then just put it in the investment and take $150 out every
month to pay down the loan.  Even if there's a net 1% difference in
rates, it won't amount to all that much for the life of the loan.
Especially if you get an opportunity somewhere to pay it off early.

   - Logan

[1] and the tax may include a deduction for the interest on the loan,
     which makes this easier to achieve!