$1639.23

That is the amount to be capitalized to my student loan.

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Ugh, right? Now I’ll have even more interest accrue once it’s capitalized at the end of the month.

And, despite a post I made earlier this year, that monthly payment reversion on my ICR to over $500 a month was temporary. I had thought they had accessed my tax return and upped the price automatically, but it turns out I needed to submit my return, some paperwork and basically re-up my ICR for another year. Starting next month, my monthly payment is approximately $292 a month. But, this does not cover the amount of interest calculated monthly.

I have a couple of decisions to make here though. If I just pay around $300 a month, that will free up another $225 a month to put towards the credit cards. And once those are paid off, I can re-evaluate how much month I want to pay toward my student loan monthly. OR, once the interest is capitalized, I can re-figure how much interest my student loan accrues monthly, pay above that amount so that I can start making a dent into that principle and make sure I have no more letters like that telling me I have even more money to pay. If I were to go with option one, I would be done paying off the credit cards by November if I take into account teaching dance again in September. If I go option two, I’m looking at probably paying off the credit cards in January. Option one would also allow some leeway at Christmas time and once the new year starts, I could start more aggressively paying my student loan. Option two, the more aggressive payments would be held off for another month or two.

I don’t have much audience participation on my blog, but I would love to know your thoughts on what you would do. Are you like me and go for the immediate gratification of paying off the credit cards as quickly as possible, or start trying to kill the principle on the student loan now and go for the longer credit card pay off?

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8 thoughts on “$1639.23

  1. Just my $.02 — it sounds like the balance on your credit cards is less than your student loans – if so, I would recommend agressively paying off your credit cards as quickly as possible to build up some momentum. Then tackle the student loans. Good luck!

  2. Ramsey suggests paying off smaller loans first but that strategy will not result in the smallest accrual of interest (and thus the fastest total pay-off time). Sinking all of your money into your highest interest loans first while putting enough towards the others that you are not hit with penalty fees or rates from them which will up their effective interest rates will result in this fastest total pay-off time. Since credit cards are likely to have higher interest rates than student loans this situation is likely one in which your smallest loan may also be your highest interest loan in which case sinking money to it will be a no brainer. Yes your student loan is currently piling on more total interest dollars than your CC debts are, but that is probably because it is a much larger debt and not because it has a higher interest rate. Pay just enough to not get hit with fees on everything else and put all your other money into the highest interest debt till it is gone then repeat.

    example (simplified by compounding interest monthly): CC1: $1500 @ 10% CC2 $4000 @ 20% Student Loan $70,000 @ 5%
    CC1 adds (1500*.1)/12 = $12.50 per month
    CC2 adds (4000*.2)/12 = $66.66 per month
    SL adds (70000*.05)/12 = $291.66 per month

    Looking at just the per month interest accrual you might think you should put money at the SL first, following Ramsey’s logic you should put money at CC1 first since it is the smallest, but looking at the interest you save each month for putting $100 against these debts shows the most efficient choice.

    Every hundred dollars you put towards CC1 debt saves you 100*12.50/1500 = $0.83 per month
    Every hundred dollars you put towards CC2 debt saves you 100*66.66/4000 = $1.67 per month
    Every hundred dollars you put towards CC1 debt saves you 100*291.66/70000 = $0.42 per month

    Your actual savings will be a little different as your debtors probably compound interest on a daily basis instead of monthly like I did here but I hope this example shows why you should attack high interest first. Just be sure to pay enough on the other loans to avoid getting hit with fees that will cause their true total interest to rise way up. For example if paying nothing on CC1 for a month cause you to get a monthly fee of $25 it’s effective interest rate that month would effectively triple to 30% since you normally would have paid just 12.50/month for 10% interest.

    Hope this helps, and good luck!

    • Thank you for the thoughtful reply! While intellectually I know it somewhere in the back of my brain, I’m not analytical enough to put it to dollars and sense. I struggle with the psychological ease of paying one off and not having to worry about it, but with your math I should focus efforts on pulling down CC2 a lot to save dollars and cents in the long run. August is a three paycheck month, hopefully I can do a lot of damage to the balance of CC2 (in a good way)!

      • Glad it helped. Remember that in my math I just guessed at what your real interest rates on the loans are, if you put the actual rates you have in a reply I can be 100% sure you’re making the right choice.

    • I pay the highest interest rate first….it sucks really, really bad to watch my other loans go up each month because of interest, but it should be worth it in the end! Good luck!

  3. I’d say credit cards first, unless your in an intro apr (in which case make sure its paid off before that’s up), or if for some reason your CC rates are lower than your student loans. Either way, I’ve found the best tactic is to go full-force on one or the other, keeping focus on either will get you out rather than going aimlessly and without purpose between both. Make a plan, and stick with it — its the only trick.

  4. Pingback: Calculations, More Websites and Other Stuff | Good-bye Debt (with less than 5 figures a year)!

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