Should I pay off my student loans? (1 Viewer)

[Bleu Raeder]

My only argument would be that you could take the money that you're paying on the loan and put it into the interest earning checking account and earn money on that money rather than paying money for that money.

 

[chrisandersen]

Pay it off ASAP.

 

[covingtondog]

I have an .825% loan for x thousand dollars. I have a 3.0% savings account for 2x thousand dollars. The GF keeps saying I should just pay off my loans and in the long run I will save more money. I keep arguing that I am pocketing a 2% difference in interest plus the tax deductibility of student loan interest. Can some one help me out here?

My argument makes sense to me, but usually she is smarter than me.

From a financial-only standpoint your reasoning is sound. But your girlfriend is probably just fiscally conservative/anti-debt by nature. So am I. The main question is this: what are you doing with the extra 2% + tax savings you are "pocketing"? If you are simply spending it on consumables then it doesn't really have any positive financial impact whatsoever for you in the long term and you would be better off paying off your loans. But if you have enough self control to save that much each month then you are benefiting from it.

 

[BoatsNBeer]

My only argument would be that you could take the money that you're paying on the loan and put it into the interest earning checking account and earn money on that money rather than paying money for that money.

Sure, but he'd have to reduce his balance in the interest earning account by half, thus losing half his interest immediately. Assuming the student loan has a 10-15 year amortization schedule, he would not reach the same level of savings in the interest earning account for 9-14 years (assuming he was putting in the payment he was making on the SL).

This strategy would result in a net loss compared with simply keeping his savings where they are and paying the scheduled payments.

 

[Saint Sarah]

I'm not sure this is as clear cut as everyone thinks it is. Are your student loans rates fixed or variable? How long is the term? What does your earning potential look like?

If you are on say a 20 year plan to pay off the student loans, your interest rate is variable and you're in line for a nice little salary or raises you may be wise to start paying them down. Because you could all of a sudden find yourself with a 7% interest rate and a salary that precludes you from taking the interest deduction.

But under the scenario you've laid out and assuming it all stays the same, it would be best to keep the money in the checking account and reinvesting your interest. Of course, you could probably get a better return somewhere else.

 

[BoatsNBeer]

From a financial-only standpoint your reasoning is sound. But your girlfriend is probably just fiscally conservative/anti-debt by nature. So am I. The main question is this: what are you doing with the extra 2% + tax savings you are "pocketing"? If you are simply spending it on consumables then it doesn't really have any positive financial impact whatsoever for you in the long term and you would be better off paying off your loans. But if you have enough self control to save that much each month then you are benefiting from it.

This is a moot point. Does not matter what he is doing with the interest, it's a net gain regardless. I am extremely fiscally conservative (ask my wife), but if it simply DOES NOT make sense to pay off a loan with such low interest rate. The fact that he has such a high interest bearing savings account only strengthens the case.

It does not make sense to pay it off even if he did not have the interest bearing savings account, unless he has no intention of borrowing ANY money for the remaining period of the amortization schedule, which is highly unlikely. Looking at his age, it'd be a safe assumption that he will purchase a home or finance a car before the payments are up. In which case, his monies would be much better served as a down payment on a 5-8% loan.

Further, having the liquidity is a much better option than getting rid of a loan with >1% interest. I have had the cash needed to pay off all of my student loans (a considerable sum) for more than a year. Unfortunately I was laid off in July. Had I used those monies to pay off my student loans I'd be in a much less tenable position at the moment. That liquidity has saved me a lot of peace of mind.

Plain and simple, it makes absolutely no sense to pay off such a low interest loan ahead of schedule. It is making you money (due to the interest bearing account). It gives you the opportunity to put those monies to greater financial use. And it gives you flexibility if hardship arises. The only reason to pay it off is "so you have no debt", which is an antiquated, old school thought process. There is absolutely no logical reason to pay it off now.

 

[Charlie Brizzown]

Get a new girlfriend.

 

[BoatsNBeer]

I'm not sure this is as clear cut as everyone thinks it is. Are your student loans rates fixed or variable? How long is the term? What does your earning potential look like?

If you are on say a 20 year plan to pay off the student loans, your interest rate is variable and you're in line for a nice little salary or raises you may be wise to start paying them down. Because you could all of a sudden find yourself with a 7% interest rate and a salary that precludes you from taking the interest deduction.

But under the scenario you've laid out and assuming it all stays the same, it would be best to keep the money in the checking account and reinvesting your interest. Of course, you could probably get a better return somewhere else.

Good point. However, student loans with that low of an interest rate are usually fixed loans and usually consolidated ones. And there are limits to the amount the rates could go up. I think the limit for my variable SL's is a .25% a quarter. If this was the case he'd have plenty of time to pay it off down the road before the rates got too high.

And even if rates did rise, it would still make sense to wait until it got to the point that it didn't make fiscal sense any longer.

And I doubt he's going to find any investment elsewhere that will return that much at this time, especially not one as liquid as a savings account.

 

[Sebastian]

I have considerable student loans thru the fed govt, all of them at 6-8% interest.
I realize that I could consolidate and have the loans down to approx. 5.5%
Does anyone else have any advice for me? Or advice on who I should consolidate thru?
How in the world did you get a .825% student loan?

 

[Saint Sarah]

Good point. However, student loans with that low of an interest rate are usually fixed loans and usually consolidated ones.

Typically, a fixed interest rate will be higher than a variable interest rate. Consolidated loans typically result in an interest rate that is some sort of average of the interest rates you consolidate. I don't think he had loans much less than .865% or whatever. Not saying you aren't right, but these two statements seem to be opposite of traditional lending practices, even those related to student loans.

And there are limits to the amount the rates could go up. I think the limit for my variable SL's is a .25% a quarter. If this was the case he'd have plenty of time to pay it off down the road before the rates got too high.

This could be true, but didn't you graduate a while ago? There have been lots of changes in the student loan realm in recent years, starting with loans from the 2007-2008 school year.

And even if rates did rise, it would still make sense to wait until it got to the point that it didn't make fiscal sense any longer.

Not necessarily. Again, the facts here are way to limited to really provide a true picture, but just carrying the debt could make other things more expensive for him. We aren't sure about his housing and other debt situation. Perhaps he's looking to buy a house. By having the significant outstanding student loan balance, he could end up costing himself a lot of money by getting a worse interest rate on his house. Which would most likely be for a larger amount and a longer period of time.

While often thought of as "good debt," lenders don't really see it that way when looking at your debt and income levels. Top it all off with the fact that student loan debt is not dischargeable in bankruptcy and a decent argument could be made for taking out a personal loan and paying off the student loans. Of course, this is all getting into facts that haven't been presented and are just unknowns.

And I doubt he's going to find any investment elsewhere that will return that much at this time, especially not one as liquid as a savings account.

Checking and savings accounts are traditionally some of the lowest interest earning investment options. I'm sure if he put a little effort into it he could find something.

 

[BoatsNBeer]

Typically, a fixed interest rate will be higher than a variable interest rate. Consolidated loans typically result in an interest rate that is some sort of average of the interest rates you consolidate. I don't think he had loans much less than .865% or whatever. Not saying you aren't right, but these two statements seem to be opposite of traditional lending practices, even those related to student loans.

This could be true, but didn't you graduate a while ago? There have been lots of changes in the student loan realm in recent years, starting with loans from the 2007-2008 school year.

Not necessarily. Again, the facts here are way to limited to really provide a true picture, but just carrying the debt could make other things more expensive for him. We aren't sure about his housing and other debt situation. Perhaps he's looking to buy a house. By having the significant outstanding student loan balance, he could end up costing himself a lot of money by getting a worse interest rate on his house. Which would most likely be for a larger amount and a longer period of time.

While often thought of as "good debt," lenders don't really see it that way when looking at your debt and income levels. Top it all off with the fact that student loan debt is not dischargeable in bankruptcy and a decent argument could be made for taking out a personal loan and paying off the student loans. Of course, this is all getting into facts that haven't been presented and are just unknowns.


Checking and savings accounts are traditionally some of the lowest interest earning investment options. I'm sure if he put a little effort into it he could find something.

Fixed rates are usually higher than variable rates in conventional lending. His interest rate leads me to believe he consolidated his loans and probably between 2004 and 2005. That is the only time period I know of where consolidators were offering rates that low. Yes, now if you consolidate you will get an average of your loan rates.

The loan debt may be viewed a little unfavorably by a mortgage company. However, I had over $100k in student loans in 2007 when I bought my current house and got a pretty good rate. However, the mortgage company would MUCH rather have the money he used to pay off the SL's as a downpayment than having the other loans paid off. The larger the down payment the better rate he would get, more so than having the SL's paid off.

I can't see a situation where you'd get a personal loan to pay off the student loan just b/c a student loan can not be discharged in bankruptcy. If you did that and then declared bankruptcy that might border on fraud. It certainly would not be looked at favorably by a bankruptcy court.

 

[covingtondog]

This is a moot point. Does not matter what he is doing with the interest, it's a net gain regardless. I am extremely fiscally conservative (ask my wife), but if it simply DOES NOT make sense to pay off a loan with such low interest rate. The fact that he has such a high interest bearing savings account only strengthens the case.

It does not make sense to pay it off even if he did not have the interest bearing savings account, unless he has no intention of borrowing ANY money for the remaining period of the amortization schedule, which is highly unlikely. Looking at his age, it'd be a safe assumption that he will purchase a home or finance a car before the payments are up. In which case, his monies would be much better served as a down payment on a 5-8% loan.

Further, having the liquidity is a much better option than getting rid of a loan with >1% interest. I have had the cash needed to pay off all of my student loans (a considerable sum) for more than a year. Unfortunately I was laid off in July. Had I used those monies to pay off my student loans I'd be in a much less tenable position at the moment. That liquidity has saved me a lot of peace of mind.

Plain and simple, it makes absolutely no sense to pay off such a low interest loan ahead of schedule. It is making you money (due to the interest bearing account). It gives you the opportunity to put those monies to greater financial use. And it gives you flexibility if hardship arises. The only reason to pay it off is "so you have no debt", which is an antiquated, old school thought process. There is absolutely no logical reason to pay it off now.

No argument at all, but it is not a moot point based on good old fashioned human nature. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-comfficeffice" /><o></o>
<o></o>
I always think of 2 of the people I do taxes for every year. They claim the maximum amount of exemptions every single year, which in theory is the right thing to do. Why give the government that money all year long? The problem is that at the end of each year these 2 people don't have a penny saved and they owe a couple thousand dollars. These people would be better off paying more during the year, even though it makes no sense financially to do so.

If he is consuming the windfall from the interest and tax savings then he would be much better off paying off the loans. <o></o>

 

[BoatsNBeer]

No argument at all, but it is not a moot point based on good old fashioned human nature. <o>></o>>
<o>></o>>
I always think of 2 of the people I do taxes for every year. They claim the maximum amount of exemptions every single year, which in theory is the right thing to do. Why give the government that money all year long? The problem is that at the end of each year these 2 people don't have a penny saved and they owe a couple thousand dollars. These people would be better off paying more during the year, even though it makes no sense financially to do so.

If he is consuming the windfall from the interest and tax savings then he would be much better off paying off the loans. <o>></o>>

I can agree with this part. I claim a minimum number of exemptions b/c I can live with the higher tax rate through the year and ensure I have enough at the end of the year to cover all of my taxes on capital gains. However, this isn't exactly the same thing. You're not "making" any money by claiming extra exemptions, even though "money now"> "money on 4-15".

In the OP's situation he is actually making money by keeping his monies where they are. In addition, he gets the use of those monies if he wants to purchase a new house, car, or if financial misfortune were to strike.

However, I do see your point.

 

[Goatman Saint]

If the payment on the loan are comfortably made, I would personally keep the cash on hand. I still haven't paid off my student debt, but at the interest/payment/tax writeoff to me its not worth it.

 

[Saint Sarah]

The loan debt may be viewed a little unfavorably by a mortgage company. However, I had over $100k in student loans in 2007 when I bought my current house and got a pretty good rate. However, the mortgage company would MUCH rather have the money he used to pay off the SL's as a downpayment than having the other loans paid off. The larger the down payment the better rate he would get, more so than having the SL's paid off.

Of course you probably would have gotten a better rate had you had your house paid off. Then again, back in 2007 many mortgage companies were pushing through lots of mortgages they should have at rates they didn't deserve, so maybe not. I mean the crazy approach to lending back then is part of what put us here. Lending to the recently bankrupt, not substantiating income, etc etc all got people into houses they shouldn't have been. But that is a totally different situation.

I can't see a situation where you'd get a personal loan to pay off the student loan just b/c a student loan can not be discharged in bankruptcy. If you did that and then declared bankruptcy that might border on fraud. It certainly would not be looked at favorably by a bankruptcy court.

Of course you can't change out your loans then declare bankruptcy, that would indeed be fraud. However, if planned right it could certainly work. Downside is it requires some good planning and a serious handle on your finances. Most people that declare bankruptcy don't have either or get blindsided by some outrageous unexpected expenses (such as medical bills).