Student Loan - Still in School - Pay or Borrow?

funkybass

Hi all,

Currently I am in my second year of law school. I've accumulated the princely sum of $125,000 in student loan debt plus $8,000 in accrued interest thus far, with one year to go. The loans are a combination of Federal Unsubsidized Loans at 6.8% and Direct/Grad Plus loans at 7.9%. This debt is only from law school and I have no undergrad debt; therefore, the amount is only accruing interest over a two year period. I'm not sure if the interest has been capitalized into the principal yet, or if that only happens after I graduate.

This summer, I am working overseas and will make about $50,000. Since it's overseas work, US taxes are not deducted and I am trying to figure out what the best long and short term plan is to (1) reduce my tax burden this year, and (2) keep my loans as low as possible.

I was wondering what the best approach to these objectives would be, and so far I have come up with two options, but I'm not sure which is better or if there are better alternatives.

Scenario 1: Pay $2,500 towards the interest of the loan to take advantage of the interest deduction. Pay the rest of the money (after tax amount) towards tuition & books, which would leave me having to borrow approximately $5,000-10,000 to make up the difference (for tuition, living expenses, etc.).

Scenario 2: Pay the entirety of my salary towards the loan principal/interest, take the $2,500 deduction, and then borrow the amount needed for tuition/living (approx. $50,000).

Thank you for your help and advice!

fermi

This is a UK site.

funkybass

Ahh, well that may help explain the lack of response

Well pretend I'm in the UK then and I asked the same question. The math behind interest rates, amortization, etc. should be universal I think. Does that enable you to reply?

Thanks

Dunroamin

No. UK student loans are a totally different affair.

RDG

Ignoring the fact its a student loan. This is a simple case of what rate you can borrow at seen as in all case you need to borrow more.

If the rate is less than you are currently paying then Scenario 2 is going to save you some money if higher then Scenario 1. Simple!

Looking at the amounts you have to borrow in the US for degrees im glad im in the UK