Product of Prime Student Loan, LLC 2013-04-10
Student Loan Repayment Strategies for T. Jefferson
Introduction Recommendations and How to Proceed
When deciding how to manage student loan debt, many borrowers In order to realize your optimized monthly payment, you will need
opt to maximize their monthly payments in order to minimize the total to perform the following:
interest paid over the lifetime of their loans. While this option may Private Loan Refinancing We recommend you refinance the
make intuitive sense, ultimately it does not make financial sense. At following private loans: 1015, 1016, 1017. This will only take 10 - 15
Prime Student Loan (PSL), we seek to optimize loan repayment. In minutes! Visit www.custudentloans.org/primestudentloan to begin
practice this means minimizing your monthly loan payments. For an refinancing.
explanation of the benefits of reduced monthly payments, see the Federal Loan Consolidation. We recommend you consolidate the
Rationale section. following federal loans to the maximum term: 1011, 1012, 1013, 1014,
PSL has analyzed your current loan portfolio and devised an 1018. Visit www.loanconsolidation.ed.gov to begin the consolidation
optimized repayment plan for your consideration. Our analysis is based process. Note that subsidized and unsubsidized federal loans must be
on the information provided in your PSL account. We ask that you consolidated separately.
review the information to ensure its accuracy and to make sure all loan
information is included. Private loan information is particularly Rationale
important, because PSL may be able to lower both monthly payments The purpose of minimizing monthly loan payments is to maximize
and interest rates on your private loans. your discretionary income, defined here as income net of taxes and
student loan payments. Discretionary income represents the cash
Results available to you to spend, save, or invest. It is the money you use to pay
You are currently making a monthly student loan payment of rent, buy groceries, take vacations, and add to a 401k.
$1,330 on the loans listed in Table 1. By consolidating federal loans When you make more than the minimum possible loan payment,
and refinancing eligible private loans, your monthly payment could be the extra cash is lost to you. If an unexpected bill or investment
reduced to as little as $760 (Figure 1). That means an initial savings of opportunity arises, you cannot retrieve that extra money from your
$569 per month or $6,838 per year. Assuming an annual return on student lender. Borrowing the money again is expensive: after student
investment of 6%, it is possible for you to save a total of $93,855 over loans, credit card debt is usually the cheapest source of unsecured
the first 10 years of repayment. A detailed analysis can be viewed in consumer debt, which often carries interest rates above 15% annually.
the accompanying Excel file titled Repayment Analysis Details . Overpaying student loans comes at a cost, termed opportunity cost.
The opportunity cost of making more than the minimum payment
Effect of Repayment Strategy on Monthly Payment on your student loans consists of the purchasing power of the lost cash,
the value of any future capital gains you might make by saving or
investing the cash, and the liquidity premium derived from having that
savings on hand. The lost value of future capital gains is particularly
important if you anticipate that investment returns may approach or
even exceed the interest rates on your student loans themselves.
Combined with the fact that investment in retirement accounts is often
tax-deductible, the opportunity cost of foregone investment
opportunities can be great.
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Table I Current Loan Characteristics
Loan ID Loan Type Amount Rate Maturity Monthly
1011 DIRECT PLUS $17,155 6.7 120 $196
1012 DIRECT PLUS $35,279 6.7 120 $404
1013 FEDERAL PERKINS $10,712 6.7 120 $122
1014 DIRECT STAFFORD UNSUBSIDI $15,121 5.5 120 $164
1015 Signature Student Loan $9,838 9.5 120 $127
1016 Signature Student Loan $6,784 8.5 120 $84
1017 Signature Student Loan $12,789 7.5 120 $151
Figure 1 Effect of Repayment Strategy on Monthly Payment. Monthly payment was 1018 FEDERAL PERKINS $8,074 3.5 120 $79
determined under different repayment conditions based on the information provided Totals $115,752 6.752 120 $1,330
in your PSL - SLH web account. Current represents your estimated monthly payment
as it stands. Consolidated represents your monthly payment after the consolidation Table I data come from the information provided in your PSL-SLH account. Table I
and refinancing of eligible federal and private loans. IBR represents your monthly shows the characteristics of your loans under your current repayment strategy in the
payment after refinancing eligible private loans and adopting the Income Based absence of PSL recommendations. Maturity is given in months. Maturity and Monthly
Repayment plan for federal loans. are calculated as described in the PDF document PSL_Disclaimer.
Product of Prime Student Loan, LLC 2013-04-10
Of course there is a tradeoff to minimizing monthly loan payments.
While you forego the opportunity cost of lost cash, you must make
lower payments for a longer period of time. You will therefore pay
more in interest over the lifetime of your loans. At PSL we favor
opportunity cost savings for two reasons. First, minimizing loan
payments allows you to use your discretionary income to repay higher
interest rate loans first. Simply repaying unsubsidized loans before
repaying subsidized loans can produce significant savings over the
lifetime of your loans. Second, as mentioned above, it is possible to
make money in the long run by investing your monthly savings.
Federal Term Extension: All Reward and No Risk
There is a clear benefit to refinancing private loans to lower interest
rates, but the benefit of extending the term of federal loans may be less
obvious. We argued that increasing free cash flow today is worth
paying more interest on federal loans in the long run. But let us imagine
you remain skeptical. You have plenty of cash saved up for a rainy day.
You do not believe market returns can reasonably approach the interest
rates on your loans. Or maybe you are fundamentally opposed to
having debt even if it makes financial sense to do so. What now?
You should still extend the term of your federal loans! Federal term
extension reduces your minimum mandatory monthly payment, but you
can always pay more without penalty. Term extension gives you more
financial freedom. It maximizes monthly free cash flow and allows you
to decide how best to use it, even if that happens to be paying back
your student loans.
If you have questions or comments, please contact us. We at PSL
are dedicated to helping you find the right repayment strategy. For
further discussion of all things related to the student lending market,
visit our blog at www.primestudentloan.com/blog.aspx.
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