(Student) Loan repayment question

Factual Questions
1

Since I don’t have anybody in the family that’s really familiar with money management, I was hoping that some of y’all would have some advice for me.

Backstory:

I went to college from 2003 to 2006 and received my BA in December. Lots of my tuition was covered by scholarships and grants, but I had to take out a student loan each semester (under one master promissary note) to cover the rest. The total principle loan is around $14,500. This is a subsidized Stafford loan.

Toward the end of my 6 month grace period, I decided to start work on my Master’s degree. Because I’m doing it online and out-of-state, I didn’t get scholarships or grants. The total cost of my MA will have to be paid with loans. I signed a new note with the same lender (Sallie Mae) for $19,500 - I’m paying $1,350 per class for 10 classes.

Backstory complete.

The reason I signed for more money than I’d need is because I’m disciplined enough to immediately send any refund money back to the lender rather than spend it on random things. This week, the university sent me a refund check for $4,500. My question is:

Do I send the $4,500 to Sallie Mae and apply it to the NEW loan, which would bring it down to roughly $16,000 OR do I send it to Sallie Mae to apply to my OLD, undergraduate loan. The reason I ask is this: my old loan has a variable interest rate (which will change next month) - as of now it’s comparable to my new loan rate (about 6.8%) but can go higher, capping at roughly 8.5%

The new loan, where the $4,500 is coming from, is a fixed interest rate loan.

So, the old one has the potential to go up to a little over 8%…would it be advisable to use the refund money to knock some of that principle down? It seems to me like I’d effectively be refinancing that 4500 into a fixed 6.8% and out of a variable, but as I say I’m not really knowledgeable about how all this works.

Regardless, the money’s going back to the lender…I just figured I’d ask what you guys would do.

2

If the loans have about the same rate, then many credit advisers would tell you to use the money to pay the smaller one first, so that you can get rid of it faster. (It doesn’t actually make any difference to the overall amount of money you’d pay, but it makes people feel better to cross a loan off the list.) If the two loans have about the same rate now, but one is fixed and one is variable, I’d pay the variable one first. It could reduce the amount you’ll have to pay if the rate goes up. (It could also increase the amount you’ll have to pay if the rate goes down, but interest rates are low enough now that I wouldn’t be betting for them to go even lower.)

3

Are you currently accruing interest in your loans now? If not then park that money in a FDIC account that you can get over 5% interest.

This assumes you won’t end up spending it.

4

Couple of important questions:

  • Is the old loan accruing and / or capitalizing interest while in deferment?
  • Is the new loan accruing and / or capitalizing interest now?
5

That’s a somewhat difficult question to answer.

Basically, each year I would be awarded a certain amount in a Subsidized Stafford Loan (which the gov’t pays interest on while I’m in school) and a certain amount in Unsubsidized Stafford loans (the interest accrues and I’m responsible for paying it when I go into repayment.)

Subsidized portions - $15,041

Unsubsidized portions - $8,500

That’s as of right now. Only my first graduate loan payment has been disbursed, so I don’t have the full 19k graduate loan on record yet.

6

The breakdown of the subsidized vs. unsubsidized loans is above.

I’m relatively sure that both the old and new unsubsidized loans are capitalizing interest currently.