Purgatory of Student Loans – The Grace Period

I am writing this post in honor of my sister who will be graduating from college in two weeks. The sooner she comes to terms with her debts the sooner she can work her way out. My brother made the joke recently that as my sister passes the podium degree in hand I will have her loan repayment schedule waiting for her. My three step response was as follows:

1. Buy a Lotto Ticket

2. Win Lotto

3. Pay off student loans

I later reflected on this joke and realized it stemmed from what many college students face when they get to the opposite end of that podium. A sense of a tunnel with no light at the end. May the post below be your glimmer of light.



Purgatory is defined by dictionary.com as “any condition or place of temporary punishment, suffering, expiation, or the like.”

I believe I am in Student Loan purgatory, the grace period. Students have 6 months after they graduate to set themselves up financially before the harsh reality of student loans sets in for a 10 year ride. The students who see the light take this purgatorian opportunity to seize the day and make huge leaps on reducing the principle on their student loans that will pay in dividends over the years. The students who look down during their purgatorian vacation slowly realize on that 6th month and 1 day that the vacation is over.

Now my situation is unique and as I found out over the last 15 months very beneficial. As you will find out over the course of my blogs I am a “silver lining” type of guy. Now as I laid out in a previous post I had over $50,000 in student loans as broken down below:

Subsidized $8,500.00
Subsidized $17,000.00
Unsub @ 6.8% $26,507.65
$52,007.65
Interest Accumulated $   2,420.22
Total Liabilities $54,427.87

Before going further I must go into detail on my unique circumstances. Typically when one graduates from college he or she goes out and seeks a job. In my situation, in order to graduate from my graduate program I had to complete a one year paid residency in which I lived in the community, worked 8 to 5 at the organization, and completed some topical paperwork on how my on-the-job experience rounded out my didactic studies. The key word to the situation is the “paid residency.” So technically I was still a student and yet had an income to cover my living expense and then some. Essentially, I had my 6 month grace period turned into an 18 month grace period, but nothing is free of course. During that 12 month paid residency I paid out $3,894.00 in tuition in addition to all the payments I was making to my student loans to keep from going further into debt.

So the “silver lining.” I had 18 months to make the biggest dent in my student loans possible which will in turn save me thousands over the course of the debt. The goal was to pay off the interest accruing unsubsidized debt before the grace period of June 15, 2010 comes around meaning we had a $28, 927.87 dollar hill to climb. Daunting to say the least.

Tools to complete the Job:

DINK (Dual Income with No Kids) household – Both of us are paid bi-weekly meaning we had a total of 4 extra paychecks a year. I automatically considered half of each of these paychecks, and sometimes more, as earmarked for the student loans giving us an even greater accelerated pay-off period.

18 Months in which to break down payments (would have to average at least $1,607.10 not including any additional accrued interest over the 18 month period)

Intangibles: Knowledge of loans, income, expense, and determination to take aggressive steps to rid self indebtedness

Understanding of student loan process at ACS-Education (a BoA loan agency)

I found out my 3 student loans had been placed into 2 groupings. The first had one part the $8,500 subsidized amount at 3.475% variable rate. The second had two parts. $26, 507.65 unsubsidized and $17,000 subsidized both at 6.825% fixed rate.

I am not 100% sure how I figured this out, but I could chose between the two groups to make my payments. So of course I made the payments to the 6.825% rate. What I came to find out 6 months later is that the loan company was dividing principles payments between the subsidized and unsubsidized portion meaning that I was paying down principle amounts on loans that were not actively accruing interest against me while the unsubsidized half of the loans were.

I learned that I had to make a verbal request by calling their 1800 number, could not set-up a standing order, to have the entirety of my payments applied to the unsubsidized portion, thus decreasing the total amount of active principle ticking interest against me daily and in turn saving me more money. I have made this phone call for every loan payment since I discovered their allocation method.

All this to say, I stumbled upon this phenomenon and because I got lucky and discovered the process to give my loan payments surgical precision I was able to save substantial amount of money which in turn got applied to the principle saving me eve more money.

Be very critical of your loans and do your homework. The credit companies are not there to walk you through the process, they want to make as much money off of you as possible.

Consolidation

I thought that consolidation was some magic process that my loans were reduced and the payment period could be shortened. I was very disheartened to find out that consolidation does nothing but make it more “manageable” for the lendee to make payments. The basic consolidation equation is the weighted average of your student loans + a charge or fee for the process. The only scenario this would be an effective measure is if the majority of your student loans was on a variable rate plan with an extremely low rate at the moment. Since over 80% of my loans were at the fixed 6.825% rate it made no financial sense to pursue the consolidation adding an additional 1-3% charge to the principle for the process. Also, I found that consolidation did very little if you were on an accelerated pay-off period, because by the time you saw any savings from the reduced interest rate you could have paid off the majority of the loan.

Payment Time-line:

2009


2010


So as of today I am approximately $2,000 away from our goal with two months of payments left to make.

Why?

You may be reading this wondering why are they in such a rush to pay off these loans. Student loans have a tax incentive up to $2,500 dollars, they are “good” debt, and we had 18 months to say up money.

The biggest reason why we got debt crazy is because I do not like having my money spent before I make it. Knowing that nearly $400 of my money would be gone before I even brought it home pissed me off. I also have a strong feeling that if we had not made a conscious decision to apply this money to something constructive we would have found ways to waste it away. The trap many 20 something’s fall into, buying cars with payments, tvs, and other expensive toys. This task was not easy and as I broke our financial picture down into ratios we learned we were giving 20 cents (20% of take home pay) of every dollar we made towards our student loans. The thing that makes us sleep easier is knowing that 20 cents over three years is a lot better than paying 10 cents a day for the next 10 years in turn “making” us money.

As you read this post ask yourself if you have a firm understanding of your student loans. Do you know your interest rates? Do you know when your grace period ends? Do you even know how much your student loans are? Now is the time to take an hour and figure these questions out. That one hour could be one of the highest paid hours of work you ever make potentially saving you thousands in the years to come.

Please leave a comment below outlining what student loan situations you may be in or how you paid yours off. Did you find this post helpful in framing how you approach your loans?

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About odysseustoday

25 year old man starting his financial journey.
This entry was posted in Education, Finances, Personal Finances, Student Loans and tagged , , , , . Bookmark the permalink.

6 Responses to Purgatory of Student Loans – The Grace Period

  1. Suertefrets says:

    Just want to say what a great blog you got here!
    I’ve been around for quite a lot of time, but finally decided to show my appreciation of your work!

    Thumbs up, and keep it going!

    Cheers
    Christian, Satellite Direct Tv

  2. Mary (cuz) says:

    I graduated with approximately $18,000 in all federal loans (some sub, some unsub) in 2003. My balance is down to about $1500 in 7 years. The best part? I paid only about $2000 of it using a fringe benefit my employer has for my specific position. It required some strategy to abide by their rules and pay the least amount out of pocket. Rule #1 – you have to keep paying the monthly minimum payment (ie you can’t use their money to go into prepaid status. So what did I do? Called the company and moved my loan to a graduated payment that required next to nothing at the beginning. Once it got higher, I stretched it to 30 years. The monthly minimums I had to pay to abide by rule 1 were as low as $40 as opposed to the $200 it originally was. Rule #2 – once your balance is below $5000 they’ll no longer give you benefit. Strategy of Rule 1 allowed me to qualify for one add’l yr b/c I would have been under $5000 a year earlier had I not used the other strategy. Check out jobs that have some form of student loan repayment as a benefit. They are out there, especially public service type jobs.

    • I have had to reread your comment 3 times to understand it, but sounds great! I have asked twice about some employer tuition reimbursement, but no luck personally. How did you figure all of this out Mary? Did you first land the job and then find the program, or were you specifically marketing for jobs with these programs?

  3. Suertefrets says:

    Just want to say what a great blog you got here!
    I’ve been around for quite a lot of time, but finally decided to show my appreciation of your work!

    Thumbs up, and keep it going!

    Cheers
    Christian, iwspo.net

  4. Mary says:

    I first looked for a job, any job, in government knowing that the salary is generally low (to start), but that fed jobs have fringe benefits, some tangible, like the federal Student Loan Repayment Program (lovingly called SLRP, yum) http://www.opm.gov/oca/pay/studentloan/. This allows fed agencies to use up 10,000 a yr in loan repayment as a recruitment or retention tool. My position was one of about 10 in DoS that required high retention rates, allowing us to automatically qualify for SLRP. I knew about the fed program, but didn’t know at the time whether or not I’d be qualified. The feds also just added another program for any public servant type jobs that will take effect 2017. Anyone in jobs such as teachers, etc, will have any federal student loans (note, not private amts above fed limits) remaining after 10 yrs of on time repayment forgiven. So the same strategy would apply – pay as little out of pocket as you can to abide by the “rules” so that you have as much as possible to be forgiven. This will apply to kids much younger than us, and I dont know the specific rules but this stuff is out there. I found out in the private industry that if they do a repayment, the tendency is to do either only schooling they have during their career or schooling that was related directly to their occupation. Ours was any loans that led to a degree.

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