I am new to this forum so forgive me if my post comes off as nonsense.

Here is the deal: I am an attorney (proud of this actually and doing great immigration related work in private practice). Combined with undergrad and law school, I have 250K of student loan debt (no private loans - only government) and currently on IBR administered by Great Lakes. I have no excuses for my debt. I own it. I maxed out on the loans I could take out not only to pay for my living expenses, to do additional study abroad while in undergrad and law school and to generally help my parents when they needed cash. I have no interest in handouts, I am trying to stay calm and just pick the best strategy on how to pay these loans off. Here are details I what I owe and then I will end with my specific questions:

1. I owe 24K in Stafford loans at 6.55% interest rate

2. 54K in graduate plus loans at 8.25% interest rate. Note: I am 8K “paid ahead” as I have been trying to quickly pay off a 13K disbursement within this 54K loan since this 54K is the one with the highest interest rate.

3. 110K on a graduate plus loan at 7.65% interest rate.

4. 62K in a Stafford loan at 6.55% interest rate.

So here are my questions:

1. My current strategy has been to “attack” my 54K loan since it has the highest interest rate. The problem with this strategy is that while I have recently made a good attempt at doing this, the principal on the other loans are increasing due to interest. Do you think this is a good strategy what I am doing?

2. I have been curious about private loan consolidators but I honestly don’t trust them. I don’t know who is a good guy and who is a “bad” guy. Though I shouldn’t necessarily trust the government either, I am thinking of parleying my experience to get into the public sector eventually once I have more experience. With the amount of loans I have would you advise consolidation?

3. Would you advise consolidation generally? Meaning even through the government? My heart burn with this is that I don’t really see what the benefit is other than one payment? My payments in order to just pay off the interest accrued would still be very high each month.

4. What is the “best” way of attacking this loan? What are some recommendations out there? What would you all do.

5. All of the loans mentioned above have “disbursements” at different amounts (see Item #2 above). Some are higher amounts, others are for lower amounts at around 2K. Would you recommend “attacking” these lower valued disbursements to knock them out earlier rather than later?

Lastly: Ideally I would like to PAY these loans off, I don’t want to pay the minimum on IBR and have the loan amount increase dramatically. Any comments/recommendations are greatly appreciated even if its just to criticize my life decisions so long as its constructive. God speed to all of you.

A few quick questions and comments:

You mentioned that the principal on the loans other than your 54k loan is going up.  If you are on IBR with a partial financial hardship and you are making your monthly minimum payments, interest you accrue should not be added to principal unless certain triggers occur (such as switching a repayment plan).  So of your 250k, how much is interest and how much is principal?

In your situation, I would not consider private loan consolidation.  First: unless you have high income, you may not qualify.  Second: if things go south for you and you lose your job, the minimum monthly payments you would have to make to a private lender could be disastrous.  Staying on a government plan lets you keep flexibility if you need it - transferring to a private loan means a temporary loss of employment is extremely dangerous.  This is an important consideration given the size of your debt.

Finally, my personal opinion, as one attorney with a large amount of student debt to another: don’t look at loan forgiveness as a morally inferior option to repayment of principal.  Look at it as an alternate means of repayment - after all, it is an option only available to people who make their required monthly minimum payments over a long period of time.  In the judgment of Congress, the president, and the DoE, it benefits the country as a whole for the debts of former students who meet those minimum requirements to be discharged.

p.s. I am by no means an expert on student loan law, not giving legal advice here, etc.

Hi James,

Thank you very much for your reply. It raised a lot of new topics and issues for me. Let me address your question:

“If you are on IBR with a partial financial hardship and you are making your monthly minimum payments, interest you accrue should not be added to principal unless certain triggers occur (such as switching a repayment plan).  So of your 250k, how much is interest and how much is principal?”

Answer: Interesting bc I have never heard of “Partial Financial Hardship”. And its even more interesting when you say interest I accrue should be added to my principal. I am not exactly sure what you mean by “principal” in this case, but what I can tell is that the 110K loan I mentioned above as approx. 9K of interest accrued on it. The amount of interest accrued has NOT made the “principal” balance go up; rather it is a separate line item showing interest. So to me that means that interest is accruing despite being on IBR… but am I qualified for “Partial Financial Hardship”? Not sure.

Thank you again for the words. Really good thoughts. Cheers.

Ok, basic loan terminology: your principal is the amount you initially borrow, and the amount that you pay interest on.  So if you borrow $100,000 at 7.5% APR, your principal is $100,000, and every year you will accrue $7,500 in interest.  As long as your principal remains $100,000, interest will be added at a rate of $7,500 per year.  However, certain events will cause the interest you have accrued to capitalize - to be added to the principal.  So say you have a principal of $100,000 in year 1, you accrue $7,500, during that year, then at the end of the year a capitalization event occurs.  Now all your unpaid principal is added to interest, so your new principal is $107,500, and at a rate of 7.5% APR, over the next year you add $8062.50.  Capitalization is bad, and you don’t want to trigger it.

http://askheatherjarvis.com/blog/what-triggers-student-loan-interest-capitalization

Here is a list of capitalization events.  A “partial financial hardship” is a prerequisite for IBR, and it means that your annual amount due under a standard 10-year repayment plan exceeds 15% of your discretionary income.  Note that making enough money to no longer have a partial financial hardship is a capitalization event.

I asked how much is interest and how much is principal because switching out of IBR and onto another plan is also a capitalization event.  Other plans *may* be better for you, but need to have a clear understanding of what will happen if you switch and your interest capitalizes.

Hi James,

Your last post was really helpful. Unfortunately, I have already experienced the triggering of capitalization. And in some ways it was a wake up call for me to truly understand these loans and how they work since suddenly my loan appeared to have ballooned. You say that a “partial financial hardship” is a prerequisite for IBR but I don’t remember showing financial hardship in order to qualify (unless my income was enough to show that). So right now I am currently in IBR, if I were to switch to Pay as you Earn, based on what you say, capitalization would trigger? Is that correct?

I also found out today that if I consolidate my loans, the ‘clock’ for the 25 year forgiveness based on IBR would reset. I have been in IBR in good standing for 3 years now. I am thinking its not a good idea to switch for me especially to avoid triggering capitalization.

Again, thank you for the comments.

1. My current strategy has been to “attack” my 54K loan since it has the highest interest rate. The problem with this strategy is that while I have recently made a good attempt at doing this, the principal on the other loans are increasing due to interest. Do you think this is a good strategy what I am doing?

It’s always more profitable to attack the highest interest rate loan first, unless you are doing the Dave Ramsey strategy of paying off the loans with the smallest amounts first to give yourself a psychological motivation to pay off the others. If you have $100 to put towards your loan options, just think of how much you’d be charged interest per year for that amount if you apply it to your loans. If you apply it toward your %6.55 loan, you will save $6.55 of interest charges for the year. If you apply it towards your %8.25 loan, you’d save yourself $8.25 of interest charges for the year. (assuming the $100 goes towards the principle and not the interest) So, a $1.70 is saved annually by putting it towards the %8.25 loan. It’s not much, but it can add up.

2. I have been curious about private loan consolidators but I honestly don’t trust them. I don’t know who is a good guy and who is a “bad” guy. Though I shouldn’t necessarily trust the government either, I am thinking of parleying my experience to get into the public sector eventually once I have more experience. With the amount of loans I have would you advise consolidation?

I wouldn’t. Federal loans are much more lenient and have much more flexible repayment options. A federal loan will give you a 90 day grace period before they report you delinquent. No late charges. A private loan may fine you for being one day late.

3. Would you advise consolidation generally? Meaning even through the government? My heart burn with this is that I don’t really see what the benefit is other than one payment? My payments in order to just pay off the interest accrued would still be very high each month.

I would only consolidate if I was interested in the Public Service Loan Forgiveness program. Only direct loans are eligible, so I’d only consolidate non-direct federal loans to make them eligible for the program. You would no longer be able to target your payments towards the loans in your consolidation, and your interest rate will either be the same or go up slightly.

4. What is the “best” way of attacking this loan? What are some recommendations out there? What would you all do.

If you aren’t doing PSLF, I’d pay off the highest interest rate loan first, but that’s just me.

5. All of the loans mentioned above have “disbursements” at different amounts (see Item #2 above). Some are higher amounts, others are for lower amounts at around 2K. Would you recommend “attacking” these lower valued disbursements to knock them out earlier rather than later?

As mentioned above, some advise this strategy as it gives you the confidence that you are progressing in your repayment. I’d only keep them untouched if you might consolidate, and they have a low interest rate. Combining them with higher interest rate loans will possibly help lower the overall interest rate.

Also, when you apply for IBR, you have to either submit your tax returns for the previous year or submit alternative documentation of income. That’s how they determine if you have a partial financial hardship. So, in your initial application, they must have determined that you had a partial financial hardship since you are on IBR. Again, only consolidate if you are planning to work in a nonprofit capacity and shooting for PSLF. Otherwise, I’d advise against consolidation as there is no point, and only negative consequences.

I think deciding whether to switch in your case is complex.  IF you are single and will remain so and IF your income is going to remain fairly low and IF the amount of your uncapitalized interest is low, you might consider switching to REPAYE to take advantage of the reduction in amortization of unpaid interest.  Or it may be in your best interest to stay in your current program.  Those are big questions, and the answers could save or end up costing you tens of thousands of dollars in the long run.  I don’t think you’re going to come to an easy answer on what the right path forward is, so you may want to consider hiring a professional financial adviser to help you sort it out.  Given the size of your debt, professional advice could be well worth the money.