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[Louise]

I have just finished a doctoral professional psychology program and
have come out with mega-debt, despite living frugally during those six
years and working summers/part-time throughout (all told, with added
interest, about 100 K). My loans are all Stafford and all with one
lender. The lender seems pretty respectable and offers some good
incentives. I am definitely consolidating (and my grace period ends
soon) and am just trying to decide between the offered incentives (I
need to select one of two when I sign up for the consolidation
package). I can choose (if I make my first 30-36 monthly payments on
time) to either get (1) 3.33% principal reduction or (2) 1% off my
interest rate (which will start at 2.625 %, including an automatic
withdrawal rate discount). The "catch" is that I can lose the 1%
interest rate reduction at any point during the life of the loan if I
am late with a payment, go into forbearance, or request any type of
deferment outside of military or school attendance. In contrast, the
3.33% principal reduction can't be "taken back".

On first blush, the principal reduction seemd the wiser route to take
(as I'll be paying these loans over the next 30 years and a sure thing
is better than the risks involved with the interest rate reduction).
However, on further thinking, I realized that if I'm able to make my
monthly payments and then pay towards my principal balance (even, say,
going on the graduated repayment plan ~$300/mo and paying twds my
principal balance the $200 difference from the standard repayment plan)
that I'd come out ahead in just a few years (having paid off $5000 from
my principal balance) and *still* have the interest rate reduction,
even if at some point I lose it. Even if I don't make principal
payments, the 1% rate reduction would pay off well before the 30-year
mark, even if I lose it at some point. Is this making sense?

Just wondering if I'm thinking this through clearly and if this option
truly looks better--I'm getting a little lost in the big numbers! Any
advice appreciated! Also any advice for long-term planning on paying
off this kind of debt!

[Rational Beaver]

I think that the second option (interest rate deduction and accelerated principle payment) is the best way to go. It seems likely that a one-time 3.33% principle reduction will be smaller than 1% interest over the life of the loan.

I don't have nearly that much debt, but I am using that technique. I take any interest reduction I can and pay more than I have to. It's worth a little sacrifice to get debt-free faster.

Hope that helps and good luck to you.
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