Using inheritance during grace period

[Rutherford]

I'm a first year IM resident with about 230k in loans between 6 and 7.9% interest. I plan on entering REPAYE after grace period, and on paying my loans quickly after graduation (no PSLF). Recently a family member passed away and left some money that they wanted to go toward our student loans. I have about 20k to use, and I feel like I should apply it to my loans even if it isnt the optimal move, financially speaking. Honoring wishes, and all that.

My loans are unconsolidated and one in particular is about 17k at 7.9% interest. My plan is to just pay it off completely prior to entering repayment in November. Is this a good plan? Will it affect the subsidy that my interest will get under REPAYE? And, practically speaking is it pretty straightforward to direct a payment to one particular loan?

[Zaphod]

Its easy to pay off a specific loan and sounds like a great plan especially if it was their wish anyway.

Why are you entering REPAYE and not refinancing if you're not going to do PSLF?

[DMFA]

Zaphod wrote:

Its easy to pay off a specific loan and sounds like a great plan especially if it was their wish anyway.

Why are you entering REPAYE and not refinancing if you’re not going to do PSLF?

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If he's making $50-60k/yr and has $230k in loans, I don't think he could afford the monthly payment on a decent refi, meaning an income-driven plan is probably the best move.  Mathematically with regard to total paid over the life of the loan, sure, he'd be better by killing off debt with absurd interest rates as quickly as possible, but when you net maybe $4k each month and lose a third of that to interest alone (assuming avg 7%, int alone is $1341, and 10-yr std would be $2670), that's a pretty tough go. I think he's stuck letting interest accrue for 3 years (with 50% unpaid subsidized, and no capitalization until leaving RePAYE) until he can get a good refi then.

The 50% unpaid interest subsidy only applies to whatever is not paid on a monthly payment.  If your principal is $230k, and you accrue $1341 of interest each month, and you pay $20,000 on it, then you've obv got no interest subsidy that month because you paid the month's accrual (and whatever other interest has accrued, since payments are processed to cover interest first, then principal).  The next month, say you accrue $1100 (since you just made a big payment that would cover some principal), and your payment is $100, then you'll only accrue $500 ([1100 - 100]/2).  That accrued interest doesn't get added to the principal, so you don't pay interest on interest; it just builds its own pile that will get rolled in with the rest of it when you refi.

$230k at an average of 7% will roll up about $1341 each month, or $16,100 per year.  If your loved one knew it would barely cover one year's worth of interest and there would be a (fairly decent) means of controlling interest accrual on it, would he/she still have wanted it to go to student loans?  The best mathematical use of it is probably to put it in Roth vehicles, but then you're stuck with not having honored your relative's dying wish...

Though 7.9% is an absurd amount...if you could invest $17,000 and be assured of a 7.9% return, you'd be crazy not to do it.  That's the argument I like to use when discussing which debt to get rid of first: looking at debt as an inverse investment.

[Zaphod]

DMFA wrote:

Zaphod wrote:

Its easy to pay off a specific loan and sounds like a great plan especially if it was their wish anyway.

Why are you entering REPAYE and not refinancing if you’re not going to do PSLF?

Click to expand…

If he’s making $50-60k/yr and has $230k in loans, I don’t think he could afford the monthly payment on a decent refi, meaning an income-driven plan is probably the best move.  Mathematically with regard to total paid over the life of the loan, sure, he’d be better by killing off debt with absurd interest rates as quickly as possible, but when you net maybe $4k each month and lose a third of that to interest alone (assuming avg 7%, int alone is $1341, and 10-yr std would be $2670), that’s a pretty tough go. I think he’s stuck letting interest accrue for 3 years (with 50% unpaid subsidized, and no capitalization until leaving RePAYE) until he can get a good refi then.

The 50% unpaid interest subsidy only applies to whatever is not paid on a monthly payment.  If your principal is $230k, and you accrue $1341 of interest each month, and you pay $20,000 on it, then you’ve obv got no interest subsidy that month because you paid the month’s accrual (and whatever other interest has accrued, since payments are processed to cover interest first, then principal).  The next month, say you accrue $1100 (since you just made a big payment that would cover some principal), and your payment is $100, then you’ll only accrue $500 ([1100 – 100]/2).  That accrued interest doesn’t get added to the principal, so you don’t pay interest on interest; it just builds its own pile that will get rolled in with the rest of it when you refi.

$230k at an average of 7% will roll up about $1341 each month, or $16,100 per year.  If your loved one knew it would barely cover one year’s worth of interest and there would be a (fairly decent) means of controlling interest accrual on it, would he/she still have wanted it to go to student loans?  The best mathematical use of it is probably to put it in Roth vehicles, but then you’re stuck with not having honored your relative’s dying wish…

Though 7.9% is an absurd amount…if you could invest $17,000 and be assured of a 7.9% return, you’d be crazy not to do it.  That’s the argument I like to use when discussing which debt to get rid of first: looking at debt as an inverse investment.

Click to expand...

Yes, I totally read that wrong. Thought he said first year after...my mistake. You dont need to tell me about the reality of resident pay and difficulty paying absurd loan amounts back, I did that for 7 years but wasnt smart enough to know this site existed.

The only thing is that interest will eventually capitalize and be very painful. 7.9 is pretty bad and I'd want rid of that one. I always look at the investment side first as those here will attest, so Im with you there, but I think my starting balance was similar though my residency twice as long and rates higher overall...ended up being more than double in the end. No fun.

[Joy Sorensen Navarre Navigate]

I support your idea to use the gift to pay off the $17k at 7.9% loan.

It will not affect the interest subsidy on your other loans. Each one is calculated separately.

Practically speaking, it used to be difficult to pay off a single loan. It is much easier now. Contact your specific loan servicer to learn their requirements.