Finances & Money

The Government is Paying My Student Loan Interest!

UPDATE: A comment reminded me that you might not all know my status. I graduated college with an undergrad about 7 years ago, but I just started my masters degree in fall 2007. Now back to the story:

I found out something interesting this weekend. I logged into my student loan site (AES) to find out my current balance. Well, something caught my eye…

Back when I graduated college, I ended with a few subsidized student loans and 1 unsubsidized one. Five years ago, I consolidated all the subsidized ones into a single loan, and have since paid off the unsubsidized one. It wasn’t until tonight that I learned what the difference was:

Subsidized loans are are loans by the federal government to eligible individuals based on financial need. The interest is not accrued during deferment. On the other hand, Unsubsidized loans are also federal student loans, but interest accrues even if the loan is deferred.

Deferment is when payments on the loan are postponed under certain circumstances, such as financial hardship or enrollment in at least half-time (6 credits) of school. Here’s American Education Service’s page on deferments and forbearances.

So the first question that came to mind was “How did AES find out I was in school?”. Well I don’t have the answer to that one right now, but maybe some of you do. Anyway, what this means is that while I’m in school and taking 2 classes, I can continue to pay down my loan, but all of my payment goes to principal! In fact, I found that all the payments since 11/1/2007 have gone towards principal alone.

I am considering just making the minimum payment ($115, but I pay $200), and sending the overpayments to something else, like our 2nd mortgage (to build more equity for a refinance), but I need to do some calculations first to determine what is our next highest interest rate debt. I need to consider that our mortgage interest is tax deductible and thus reduces the effective rate. Oh, and before you say anything, I’ll admit we can’t deduct student loan interest anymore, or at least very little.

It would be nice to get rid of those smaller debts, but I really do need to be smart and do the math this time. As much as our 2nd mortgage seems like an insurmountable amount to pay off, we only need to reduce it by about $20,000 over 20 months to be able to refinance (give or take). It’s manageable, but it would change our debt payoff goal of early 2009. We’ll see.