Your Questions About Save Loan Interest

Chris asks…

Save for home or pay down student loans?

I have 30k in student loans and 1400/month to put towards savings or loans. I would like to buy a house in 5 years.

John answers:

Pay student loans first because interests accumulated over periods of time. The longer you postpone paying the loan, the higher the interests are. So pay student loans first and then get a house on loan. This way you will be saving from interests on student loans to help pay your housing loan. If you save for a house, in five years’ time your savings for the house will just be enough to pay your interests and principal for the student loan which will end up nothing in savings. Paying your student’s loans now, in five years’ time you can start a new loan for the house you dreamed of.

Mandy asks…

Does subsidized loans have interest?

I was wondering which loans have interest (Subsidized, unsubsidized, and parent loans). I heard you dont have to pay interest on subsidized, but you do have to for unsub and parent loans. IS that correct? So i the subsidized loan is the better one?

John answers:

Pheonix:

The subsidized Stafford loan is one of several types of Federal Student Aid called “need-based aid”. You don’t apply for those types of aid separately – when you complete the FAFSA, the Department of Education will determine whether you are eligible for them.

Check the Student Aid Report (SAR) that you received after you submitted your FAFSA. If your Expected Family Contribution score was 4041 or less, you are said to have demonstrated “exceptional need”, and this would mean that you were eligible to be considered for the need-based forms of aid, including both the Pell Grant and the subsidized Stafford Loan.

When you receive your aid offer letter from the financial aid office at your school, you’ll know exactly what types of aid you have been awarded – and how much of each. If you qualified for a subsidized Stafford, that will be one of the forms of aid that is listed in your aid package.

There is a strict limit to the amount of subsidized loan that you can take each year – for a dependent freshman, that amount is $3500. Your school can offer you as much as $5500 in Stafford loans, but only $3500 of that can be subsidized – the other $2000 will be offered to you in a regular, unsubsidized loan.

Many first time aid recipients become confused about why their school is offering both a $3500 subsidized and a $2000 unsubsidized, and they’re thinking “Why would I take the smaller unsubsidized loan, when the larger loan is a better deal?”.

The answer is that your school expects you to need (and take) both of them – it’s not a “choose one or the other”, it’s a “here’s the largest subsidized loan we can offer you, and another loan, too”.

All loans charge interest – if it weren’t for interest, the lender wouldn’t make any money – and no one would offer loans. The difference between the subsidized and unsubsidized has to do with what happens to the interest.

In the case of the unsubsidized loan, your lender simply adds it to what you owe. You borrow $10,000, I charge you $680 interest in the first year – you don’t pay it, so I add it on to the $10,000, and now you owe me $10,680.

With the subsidized loan, the lender still charges you interest, but the government pays it for you – that’s why it’s a form of need-based aid for the most economically disadvantaged borrowers. The government won’t make the payments forever, but they will make them for as long as you remain in school – and for 6 months afterward, at which point, it becomes time for you to start paying your own loan.

Over the 10 year repayment of a Stafford loan, you will save several hundred if not thousands of dollars in interest thanks to the government picking up the tab for a few years. As I said, though, you can only borrow up to a maximum amount in subsidized loans every year, and the government will only pay the interest until it becomes time for you to begin making your loan payments – 6 months after you leave school.

I hope that helped with your understanding – good luck!

Maria asks…

Should I pay off loans or save?

My husband is getting a 5400 re-enlistment bonus. 1800 of it is going to a government card, and the rest is up to us. We have a ridiculous amount of loans….we had a flood and lost everything, so we took them out to replace our home and the things in it. We have roughly 700 that comes out of our account every month, making DH’s check pretty small.

So, we can either 1. pay off the highest interest loan which is 2300 and get 309 extra on our checks
2. pay off a little of each loan
3. save the money for our child (we’re expecting in April).

John answers:

Pay off the highest interest loan then save up $1000 for an emergency fund. Then go to paying off the loan that has the least amount left to pay, put everything extra towards it. When you get it paid off take the amount you were paying on that towards the next loan that has the next least amount to pay off and on down the line. You could get a job till March that will help some too. A lot of people live on less than $1200 a month and still manage to pay bills…

George asks…

Car Loan Question?

OK, I will soon have my liscense and be in the market for a car to drive to college and all that stuff. I have a question about car loans.

Will my interest rate be super high being my first loan and having no credit history to start off with? I intend on buying a car that is about 16,000 dollars and I’m saving up 1,500 for a down payment.

John answers:

Save up $2500 and pay cash for a good used car. Do you really want to be strapped with a $300 (or more) car payment EVERY month while you are in school? I wouldn’t.

Yes, if you do decide to get a loan, the interest rate will be fairly high. Ask the dealer for his best rate, then call a couple of local banks, or a credit union if you are a member. You may well be able to find a cheaper rate on your own.

But, again, do you really want to have a car payment in college?

Robert asks…

Advice on saving with debt.?

My son wants to save up to go travelling in Oct but he is still paying off a loan. I have recommended that he should pay off the loan outright first and then save, but apparently it would cost him an extra £29 to settle so he wants to just let it run for a year while he saves.
Whats best?
And what should be considered?
Paying it off would leave him with a £1000 overdraught at 18.9% The loan was at 11.3% and had a year left. He could work off the overdraught in a month.
Which is best?

John answers:

The interest he is paying on an outstanding loan is going to be far higher than the paltry interest he would get in a savings account. It is always best to pay off debts before trying to save. The £29 settlement fee is hardly here or there is it.

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