Which student loan to pay of first? LIBOR vs PRIME

[d2rx]

So I currently have 3 student loans and I would like your opinions on which to pay off first.

Loan 1: $120000 @ 2.25% 1 month Libor // $800 monthly minimum // max rate of 18%

Loan 2: $29000 @ 3.25% Prime rate // $160 monthly minimum // max rate of 25%

Loan 3: $4300 @ 3.150% Fixed // $54 monthly minimum

 

Typically, I would pay off the loan with the higher rate but I am concerned how the rates might change over time. Will both prime and LIBOR rise and fall about the same? or is the LIBOR more likely to rise faster? If they would rise the same, then I would pay the prime rate loan off first. I am trying to pay off ASAP. I have averaged about $4300/month in payments the last 12 months.

Thanks

[Zaphod]

d2rx wrote:

So I currently have 3 student loans and I would like your opinions on which to pay off first.

Loan 1: $120000 @ 2.25% 1 month Libor // $800 monthly minimum // max rate of 18%

Loan 2: $29000 @ 3.25% Prime rate // $160 monthly minimum // max rate of 25%

Loan 3: $4300 @ 3.150% Fixed // $54 monthly minimum

 

Typically, I would pay off the loan with the higher rate but I am concerned how the rates might change over time. Will both prime and LIBOR rise and fall about the same? or is the LIBOR more likely to rise faster? If they would rise the same, then I would pay the prime rate loan off first. I am trying to pay off ASAP. I have averaged about $4300/month in payments the last 12 months.

Thanks

Click to expand...

I would just continue to pay them off based on rate until those rates change.

The prime rate is related to the federal funds rate, so it will change very slowly and will be somewhat telegraphed far ahead of time and most likely come in 25 basis point increments.

The libor is an interbank lending rate, and normally would also move slowly. However, due to the money market NAV rule coming into effect on Oct. 17, 2016 (mm funds used to be used by banks for short term funding, now it wont be), the libor has spiked this ytd and likely will rise some more until it stabilizes after the full change over. Hopefully, it goes back down a bit after that.

Either way, any changes are relatively small and measured, but the real issue is you have crazy high maximums, but itd be a wild sequence of events to hit them.

[d2rx]

Reviewing my original post above, the current interest rate on loan 1 is now 2.75%. I have not been as aggressive as I like. I am paying just about 1,000/month. Considering the projected pace at which interest rates are now rising, would it be wise to refinance at 4.00% fixed on a 15-year term? This loan is with my Credit Union.

$110000 @ 2.75% 1 month Libor // $800 monthly minimum // max rate of 18% // 15 year term

vs

$110000 @ 4.00% FIXED // $812 monthly minimum // 15 year term

 

 

Thanks!

 

[paramount]

I wouldn't refinance to a higher interest rate, especially since you are paying 4300 per month, you will be done in <4 years.

Keep going at your pace and you are fine.  Those are all very low interest.

 

What makes you worry that your variable rate is going to rise so quickly?

 

 

[Zaphod]

d2rx wrote:

Reviewing my original post above, the current interest rate on loan 1 is now 2.75%. I have not been as aggressive as I like. I am paying just about 1,000/month. Considering the projected pace at which interest rates are now rising, would it be wise to refinance at 4.00% fixed on a 15-year term? This loan is with my Credit Union.

$110000 @ 2.75% 1 month Libor // $800 monthly minimum // max rate of 18% // 15 year term

vs

$110000 @ 4.00% FIXED // $812 monthly minimum // 15 year term

 

 

Thanks!

 

Click to expand...

I dont get the question. Rates arent rising that fast at all. The projected (which can obviously be very wrong) end of year 1 month libor is 40 basis points higher. With every payment below the current fix rate offered to you, more of every payment is going to principle. If you're concerned about hitting those crazy maximums, dont worry, you wont, just refinance with Sofi or somewhere the max is 8%. If you are not happy with your progress put a little more towards every months payment, this further reduces your effective interest rate. Youre in control.

If you are one day offered a fixed rate that is near your current variable than fine, but otherwise youll have benefitted from the more principal paid down during the initial stages and still come out ahead. Make a spread sheet with standard, moderate, and severe interest rate increases. Remember any interest rate creep should reflect a concomitant inflation pressure which means in real terms it should be a wash. Now I dont know about you but I dont have much hopes pinned to runaway inflation any time soon.

Take it to excel and work it out.

[DMFA]

Meh. They're all p low. Just do the Ramsey Snowball.

[d2rx]

Thanks for all the responses. Zaphod, I just had to familiarize myself with what “basis point (bps)” means. So, my current loan is at 2.75% or 275 bps (LIBOR + 2%). The Feds already raised rates by 25 bps this year and are expected to do so two more times this year, (assuming 50 bps). This is close to the 40 bps estimate you mentioned (which site is this from?). Rates are supposedly expected to be raised three times in 2018 (assuming 75 bps). At this rate, my loan would be at 4% by December 2018. Of course, this is all speculation and the rates might be lower.

I have been playing with the numbers in Excel. The $ difference between 2.75% and 4% is ~$115/month. If rates remain the same, that is at least a $2000 difference between now and 12/2018. This is something I have to think about. Realistically, I could pay off all my loans in 7 years.

My assumptions above are from this article.

https://www.washingtonpost.com/news/wonk/wp/2017/03/15/fed-hikes-interest-rate-hits-brakes-on-growing-economy/?utm_term=.11043b7f715b

[Zaphod]

d2rx wrote:

Thanks for all the responses. Zaphod, I just had to familiarize myself with what “basis point (bps)” means. So, my current loan is at 2.75% or 275 bps (LIBOR + 2%). The Feds already raised rates by 25 bps this year and are expected to do so two more times this year, (assuming 50 bps). This is close to the 40 bps estimate you mentioned (which site is this from?). Rates are supposedly expected to be raised three times in 2018 (assuming 75 bps). At this rate, my loan would be at 4% by December 2018. Of course, this is all speculation and the rates might be lower.

I have been playing with the numbers in Excel. The $ difference between 2.75% and 4% is ~$115/month. If rates remain the same, that is at least a $2000 difference between now and 12/2018. This is something I have to think about. Realistically, I could pay off all my loans in 7 years.

My assumptions above are from this article.

https://www.washingtonpost.com/news/wonk/wp/2017/03/15/fed-hikes-interest-rate-hits-brakes-on-growing-economy/?utm_term=.11043b7f715b

Click to expand...

Sorry about the basis point thing, that was annoying to me for a long time too and it seems I totally forgot about it. The fed rate hikes do not really or directly/proportionally effect the libor rate. In fact the libor has been rising long ahead of the fed funds rate. Thats really only pertinent for banks and a gauge of the economy as a whole or snapshot of where they think we are in the cycle.

The monthly payment doesnt matter really. The rate influences how much goes to principle vs. interest and the lower the rate the faster you are paying down principle.