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Questions about Interest
Hi Heather! We found out we qualify for IBR and our payment for the next 12 months is 0.00. Our interest, however, is $1,013 per month. Should we pay it even though we aren’t required to? I wonder if we should even worry about it because my husband has a higher paying job now so when we apply for IBR next year, our payment won’t be 0.00 anymore. It will likely be about $900. That won’t cover the monthly interest. So what I’m thinking is, the interest is going to get ridiculously out of control over the next 25 years that we’re on IBR anyway, so what is the point of trying to pay that $1,013 every month for these next 12 months? Should we use that money to pay off our car instead, for example?
Also, about the interest that capitalizes each year when you apply for IBR—we owe $2200 in that. Should we try to pay that off each year? Or not worry about it because it’s going to capitalize so much in the future anyway and it will be out of our control?
Basically, should we only pay whatever the minimum on the IBR program tells us because after this year, that’s all we will be able to afford, anyway? And just let go of trying to manage the interest because it’s probably too late/ out of our hands?
Well, Cristi, those are good questions. Whether or not you should pay more than the minimum is a decision that depends on your whole financial situation. I don’t provide personalized financial planning advice because I couldn’t give you good advice without knowing all the details of your particular circumstances
It sounds to me like you are considering the right factors. And also look at the interest rates of all your outstanding debts when you are deciding which to focus on paying down most quickly. Note what triggers capitalization of unpaid interest under IBR and what doesn’t.
A self-help book I love and recommend is All Your Worth: The Ultimate Lifetime Money Plan by Elizabeth Warren and Amelia Warren Tyagi.
A financial advisory firm that I work with is GL Advisor. I suggest their Free Personalized Assessment as a way of deciding if it makes sense for you to hire professionals to help with these decisions.