Wiser Use of Money: Pay Off Student Loans / Invest - Page 2

KJS · #11 04-13-2007, 03:51 PM

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Something to keep in mind is that a lot of your investments will be taxed, so you'll need a higher return on an investment than interest rate on your loan to make the investment the correct choice. At 6.8% you should almost certainly pay off the loan before investing.

I have a student loan at 7.2% that I'm aggressively paying down before I start investing. I'm pretty sure I'm making the right choice.

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Good point about taxing investments. But dethgrind can't you also deduct student loan interest off of your taxes, to the point where the effective interest rate is much less?

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I just did my taxes last night. 2500 is the max deduction for student loan interest. Came right off my income.

KJS

HDPM · #12 04-13-2007, 04:27 PM

It looks like many will disagree on this. IMO this is not a question of 3% or whatever ev either way. This is a question about how you want to live, your future, and freedom. That means pay the loan off now. Investments go bad, your income might go bad, etc... If you are debt free and have some money in the bank, you can go do what you want. You can also build wealth as you go. Invest your monthly student loan payment or whatever. Until you get that loan paid you have a problem. It isn't dischargeable in bankruptcy I am pretty sure (not legal advice disclaimer, etc....), it doesn't carry great tax advantages, although some is deductible, and limits you in all kinds of ways. If you choose to buy real estate, you will have 2 payments assuming you get a mortgage and assuming you don't pay the student loan.

So I know if the after tax theoretical return on an investment is a few points higher than the interest on the student loan, many will argue that you should keep the debt. Except there is a big, big difference in life between having a debt you can't sell or discharge, having a monthly payment, and being debt free.

You are too young and in too good a position it sounds like to shackle yourself with debt of you don't have to. Sounds like you will have 20K left over if you pay the debt. I would pay the loan, put some in the bank, invest the rest, and add to the investments each month. Then if you decide to buy real estate you will be in a much better position to do it. The coming years might be a good time to buy given all the forclosures. Learn from the people losing their house. Don't carry any other debt if you can avoid it and don't go overboard on mortgage debt either. You will get the same arguments about whether to pay your house off or invest and the same talk about comparing percentages of return vs. interest. But owning a house allows you more freedom than financing one. Not saying don't finance and I'm certainly not saying buy a house instead of investing. Long term you want to own your home and have investments, right? So start. Dump the debt IMO.

steel108 · #13 04-13-2007, 04:30 PM

This seems like simple math:

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

I would tend to go with the safer route and pay off the debt. Investments aren't a sure thing and it just feels good to be debt free.

dethgrind · #14 04-13-2007, 04:31 PM

Yeah, true, you can deduct student loan interest so I guess the tax thing can cancel itself out and you essentially have a straight up interest rate comparison. In my personal situation, I come nowhere near the 5000 standard deduction so I just take that anyway.

AceLuby · #15 04-13-2007, 04:55 PM

I'm in a similar situation as well. I just received a death benefit claim of around 50k, w/ a little more than 25k in debt. I am planning on putting the maximum (4k/yr) into a Roth IRA. The interest isn't taxable. While I put my $$$ into that I'm going to keep the rest in a regular savings account and some into Vanguard Index Funds, but probably only 5k or so. Here is my reasoning:

1) No tax on the interest in the Roth IRA
2) I can take out the principle at any time w/ no penalty.
3) Housing market sucks right now. (prices are on a decline)
4) I am comfortable w/ my income/bill ratio, so keeping the monthly payments isn't that big of a deal

Just my .02

MasterLJ · #16 04-13-2007, 05:04 PM

Student loans are at such cheap interest that you would be foolish to pay them off early when you could easily invest your cash and get a return higher than the interest you pay on your loans.

kidcolin · #17 04-13-2007, 05:21 PM

"You are too young and in too good a position it sounds like to shackle yourself with debt if you don't have to."

If you have $55K, chances are you aren't going to have much trouble paying that monthly loan payment. Unless of course he's got some ridiculous repayment scheme and high interest. For a lot of people my age, the interest on the loan is is under 4%, and it's easy to get better than that in a simple and safe savings account. As much as being debt free is nice, student loans are about as cheap a debt you can have, and having liquid cash is a really nice thing. I'm in a position where if anything major comes up, I can pay it and not leave myself in a jam. I'm not losing any money not paying the loan, and I keep myself 15K richer in the meantime. That's a lot more freedom in my eyes.

Anyway, this is a pretty simple issue. Look at your interest, look at your investment opportunities, assess the risk/reward, assess your own comfort/mindset of being debt free, etc etc. Myself personally, I'm not investing at a big enough clip such that my net gain of not paying off the loan is all that huge. But I feel a lot more comfortable with that 15K in my bank than not. For others, not owing anyone anything is a comforting feeling, and they'd gladly pay it right away.

El Diablo · #18 04-13-2007, 05:26 PM

J,

I agree with HDPM here. Sure, maybe you can average a couple of points more on your 35k by investing. Not really a significant amount of money. On the other hand, to be able to not carry any debt, man I love that flexibility. For me it's a no-brainer, pay off the loans.

Arnfinn Madsen · #19 04-13-2007, 05:27 PM

BTW, stupid beat. I forgot to change my address with the State Student Bank and thus didn't pay a bill or the 2nd request. They then sent me a bill for the whole loan (about 30k). I didn't want to do it due to the low interest. I called them and said: "relax, I will put something as security". They agreed and I put my flat as security. Later I sold my flat and a few days after the sale my real estate broker called me and said "we transfered you all the money, but now these guys come and claim 30k, can you transfer 30k back?". I called them and offered some other security to keep the loan, but they refused since it was worse than my previous flat.

Cliff notes: I am stupid.

MasterLJ · #20 04-13-2007, 05:35 PM

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J,

I agree with HDPM here. Sure, maybe you can average a couple of points more on your 35k by investing. Not really a significant amount of money. On the other hand, to be able to not carry any debt, man I love that flexibility. For me it's a no-brainer, pay off the loans.

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Just a small point. A loan at 3% is technically free money, you're simply paying inflation.

I'm pretty biased since I had one of my larger investments make an average of 14% or so for the last 5 years.