# Projected interest rates

The background: I’m trying to figure out the best way to pay my student loans, and being me I’m making this an excessively complicated optimization project. I’ve got a variety of different loans, with different terms*, some variable interest rate, some fixed.

Now, I’m making enough at this point to pay extra, and I want to know where it makes sense to pay first. I’m planning on going to grad school next year, where I can defer loans, and my stipend will only be enough to make small payments. There are two general approaches that I see. 1. Pay off the currently higher interest loans first, or 2. pay off the variable loans which I can’t defer interest-free during grad school, also anticipating that interest rates will generally increase in the future.

So, when I put together my excessively complicated spreadsheet to estimate all of this, I want to account for future interest rates. Which I know is hardly a certain thing, but I’m sure that various economists out there project such things under different scenarios. Can anyone point me to the more respectable projections out there? Google dredges up some pretty unreliable looking links in my searches, but I admit I don’t know the magic words here.

*I’ve got some loans which have a variable interest rate, which currently is pretty low (around 3%). I’ve got other loans with fixed interest rates (around 7%). Some of my loans are subsidized federal loans, meaning they’re interest-free when I go to grad school next year. There’s yet another loan which will be interest free if I pay it all off within the next few months, but will capitalize five years worth of interest otherwise.

This answer has never been easier. It doesn’t matter what forecast you look at. All interest rates for the types of loan you are talking about are going up. Money is being lent at rock bottom prices.

Still… It is incredibly unlikely that a 3% rate will climb to a plus-7 rate, because if that is happening, the whole economy is going into mind-crushing inflation.

Pay towards the 7% loans faster. Focus on those.

Is it possible you would suffer by paying those first and focusing on the variables that might climb above 7 someday? Possible, but not likely at all.

I guess I didn’t make this clear. My 7% fixed interest loans are all federally subsidized, and (if all goes to plan) that means when I’m in grad school for 4-6 years, starting next year, they won’t accrue any interest. So they’re 7% now, 0% for a few years, then back up to 7%. My (private) variable loans are 3% now, will probably go up, and will still earn interest even when I defer them during grad school. Which makes it a bit more complicated in my mind… but I might be overthinking this.

Try running some spreadsheets with the various hypotheticals. One column for the fixed / deferrable loans, one for the variable ones (and play with different hypothetical interest rates)… See what your bottom line would be in each case, at the end of each of the next couple of years.

Obviously you don’t know what rates will do, but do you have any figures on how much the variable ones can adjust in any given year? Try assuming they’ll go up the full amount.

From what you say, I’d consider paying off that one free-if-paid-soon loan as a highest priority since it’ll cost you a lot if you don’t, then apply extra money toward the variable. Yeah, you’re paying more on the 7% loan right now, but in a year you won’t be accruing any interest on it. And the more you prepay on the variable one now, the less it’ll be accruing interest on next year.

Oh yes: If you have the 7% loan requiring a hundred dollars a month right now, when you come out of grad school you’d still need to pay that hundred dollars a month regardless of any prepayments, right? The prepayments would just shorten the number of months you’d have to pay on it afterward.

Whereas if you prepay the variable (say, it’s 50 dollars a month now), does the required minimum payment go down a bit the following month? I kinow when we had a variable mortgage, the annual adjustment took into account any prepayments we had made, so our adjusted payment was a few dollars lower if we’d prepaid some.

The answer is remarkably simple.

Make the minimum payment on all of your loans.

Take any extra money you have at that time and put it to the loan with the highest interest rate at that time.

This is the simple and fastest way to reduce debt.

You’re probably right, but I’m the kind of guy that likes to see the results myself – thus my crazy spreadsheet plan.

My biggest variable loan is based on the LIBOR plus 3% (so it’s actually at 3.3% at the moment). I was hoping to find some sort of longer-term predictions on where the hell it will end up over the next 10 years – though I realize that would be a pretty wild-ass guess, even from the best economists.

Normally yes, but the OP has a couple of unusial complications to this picture, including the short-term “pay all now or pay 5 years interest”, and the medium-term “higher rate goes on hiatus”.

Using the simplest approach, he (she?) would pay extra on the 7% loan, but then in a couple of months get slammed with interest on that one odd loan… then in a year would have to pay the full payment (possibly larger than the current payment) on the variable loan

Hence the suggestion to play around with a bunch of what-ifs.

So you have to take into account the time frame and cash flow issues. E.g. we have a primary mortgage at 5.125%, and a variable HELOC currently at 3.5%. Longer-term, we’d save money by prepaying the primary, but in the short term, prepaying the HELOC this month slightly reduces the amount we have to pay next month. The OP’s picture is even more complicated.