Wiser Use of Money: Pay Off Student Loans / Invest

[claudenm]

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Ha, I have been thinking about this alot recently, although it is more of a theoretical fantasy, as I don't have the money to pay it off (broke and talentless FTW!)

I pay $200/month on my 15k loan @2.875%, what are all of your thoughts about increasing it another $100 vs. saving that $100? That may be a bit trivial, but thanks in advance for your thoughts.

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Why, why, why, oh why would anyone even consider paying off a 2.875% loan or paying it faster than the minimum? Considering the rate of inflation is higher than that, and you can get a higher ROR on almost any CD, there is no way you should ever pay this off. Pay any other debt first. Save for a house, as this will reduce your mortgage by giving you a higher down payment. Buy CDs. Play higher stakes. Just about anything other than putting it all on red or buying a scratcher ticket.

FWIW, I am able to get grad stuedent loans that after graduation will convert to 0.75% per year. I will take every penny I can get and pay it off as slow as they allow. When someone hands you practically free money, you definitely take it.

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For one, I don't like having debt. My student loan is my only debt. For two, it is free money in a sense, but it's money I've already spent. It's not like I can take that money and arb it with a savings account, it's money that has already been spent. Perhaps it is just a purely psychological thing that I would prefer not to have any outstanding debt?

[Jeff W]

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If there is an investment vehicle that pays better than lending to students at 6.8% (minus some amount for guys that never pay back), why doesn't the bank put its money there instead?

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Risk.

[Jeff W]

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This seems like simple math:

Will the money you make from investing be greater than the interest you will be paying?

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It's not that simple.

If it was, everyone would be making investments on margin because the market return is greater than the interest rate of the loan.

[Matt Flynn]

Jurollo,

Slam dunk to pay off the 9.25%.

The other one is tougher. Does having loans bother you? It really bothers me. We still owe 19K at 5% on med school loans and have not paid them off because of the low interest rate. That debt causes me stress. The money saved is probably not worth it. But we're abnormally debt-averse for our generation, with the exception of mortgages and business leases. Your approach may be different.

For background, my 93-year-old grandmother still separates two-ply paper towels for individual use, among many other Great Depression unfathomables.

Matt

[SlowHabit]

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debt causes me stress.

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[Valium]

If you are good at managing and investing your money, hands down it is -EV to pay off your student loans, unless you have a bad interest rate.

My loans are locked in at 3.xx% and I make over 5% just in my internet savings account, much more than this in the markets. The choice is clear. I'd be losing a lot of money by paying off the loans early.

Now if I wasn't good at managing my money or good at investing, then it would be better to pay them off and not have to pay the interest etc

Also important to note that student loans in good standing are considered 'good debt' in that they actually help your credit score and help you to build credit, get loans etc etc.

[Valium]

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Slam dunk to pay off the 9.25%.


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Just saw this. At 9.25% pay them off, and now.

[bobman0330]

I don't plan to hold off on paying student loans to invest in real estate or the stock market, because I want to get clean ASAP. OTOH, a lot of people have interest rates so low it's possible to get an after-tax return just by putting the money in a savings account or CDs. In that case, it seems dumb not to take the free money. You know the money will be there when you need to make payments, and you can always pay off the debt early if you need or want to.

[claudenm]

I've been thinking about this a bunch more tonight, and you all are right, I'm just going to pay the minimum and throw the rest in a High yield savings account or a CD. Thanks for posting this topic Jurollo,it has been on my mind for a while.

[Noo Yawk]

Without rehashing HDPM's advice, another benefit to paying off your debt is that it will allow you to borrow money at a much lower interest rate down the road. Assets in the bank,a good debt to income ratio and a good credit score will make borrowing money at great terms a snap should the need arise.