Financial gurus - is there any benefit to paying off student loans early?

[Kev]

I'm a complete retard when it comes to money. All I know is to not waste it and not spend beyond my limits. Anyways...

On your tax return you can deduct interest paid on student loans. So would it be better to just keep making the minimum payment for your loan. Would you actually save more by paying the minimum and saving the rest in a CD or HSBC direct?

 

[Nerva]

for me i dont think there is. because your income will growth really quickly from year to year after graduation. you might be paying more in the long run, but discount it back to today and you will see why.

 

[Cattlegod]

if you actually invest your extra money into something where you receive a higher return rate than your loan it is better to just pay the min and invest. but if you are just going to buy a new video game, then put the 50 bucks toward your student loan.

 

[Wreckem]

Originally posted by: Kev
I'm a complete retard when it comes to money. All I know is to not waste it and not spend beyond my limits. Anyways...

On your tax return you can deduct interest paid on student loans. So would it be better to just keep making the minimum payment for your loan. Would you actually save more by paying the minimum and saving the rest in a CD or HSBC direct?

It really depends what your interest rate is. If you are one of the lucky bastards that was able to consolidate before the July 1 hike and have an extremely low interest rate. Investing would be the better plan.

If you are locked in at the new permanent rate. I'd say pay it off asap.

 

[azoomee]

Depends what the interest rate is and where you could get more "interest / return" on your money instead of paying it off.

Also, can you afford it?

 

[Sukhoi]

But isn't the interest just a deduction against your gross income? So you pay say 30% of X amount of interest less in taxes. You're still paying 70% of the interest. I guess if you could find an investment where (gain on investment - tax on gains) > (interest paid on loan - tax reduction due to interest payment) then maybe you could come out ahead.

I don't know financial stuff so that could be all wrong and correct me if it is. But it makes sense to me. IMHO you aren't going to make that much money off the above scenario unless you have HUGE low-interest loans so I'm just going to pay mine off.

 

[giantpinkbunnyhead]

Depends.... if you don't have much left, it's worth it simply to lower your monthly overhead and get one more item off your credit report, so in that case I'd pay it off if possible. But if you've got like... $10K or something and really low payments... don't rush it, pay more expensive debts first or, if you have none... maybe finding a good investment would be the right thing.

 

[Sukhoi]

Originally posted by: Wreckem

Originally posted by: Kev
I'm a complete retard when it comes to money. All I know is to not waste it and not spend beyond my limits. Anyways...

On your tax return you can deduct interest paid on student loans. So would it be better to just keep making the minimum payment for your loan. Would you actually save more by paying the minimum and saving the rest in a CD or HSBC direct?

It really depends what your interest rate is. If you are one of the lucky bastards that was able to consolidate before the July 1 hike and have an extremely low interest rate. Investing would be the better plan.

If you are locked in at the new permanent rate. I'd say pay it off asap.

I have $11,620 at 2.625% fixed coming due in about two weeks. Do you think I should create an "untouchable" ~4% internet savings account with enough to pay off the loan in it and just pay it over 10 years, or pay it all off this summer?

 

[Wreckem]

Originally posted by: Sukhoi

Originally posted by: Wreckem

Originally posted by: Kev
I'm a complete retard when it comes to money. All I know is to not waste it and not spend beyond my limits. Anyways...

On your tax return you can deduct interest paid on student loans. So would it be better to just keep making the minimum payment for your loan. Would you actually save more by paying the minimum and saving the rest in a CD or HSBC direct?

It really depends what your interest rate is. If you are one of the lucky bastards that was able to consolidate before the July 1 hike and have an extremely low interest rate. Investing would be the better plan.

If you are locked in at the new permanent rate. I'd say pay it off asap.

I have $11,620 at 2.625% fixed coming due in about two weeks. Do you think I should create an "untouchable" ~4% internet savings account with enough to pay off the loan in it and just pay it over 10 years, or pay it all off this summer?

In terms of real dollar value, you will come out well ahead if you invest the money and pay it off over ten years. Why? Because thats a bad loan for the lender over the next 10 years. The lender would probably love to see you cut them a $11,620 check.

Edit: The 2.625% is fixed over the 10 years right? Your grace period is up in two weeks I take it?

 

[Sukhoi]

Originally posted by: Wreckem

Originally posted by: Sukhoi

Originally posted by: Wreckem

Originally posted by: Kev
I'm a complete retard when it comes to money. All I know is to not waste it and not spend beyond my limits. Anyways...

On your tax return you can deduct interest paid on student loans. So would it be better to just keep making the minimum payment for your loan. Would you actually save more by paying the minimum and saving the rest in a CD or HSBC direct?

It really depends what your interest rate is. If you are one of the lucky bastards that was able to consolidate before the July 1 hike and have an extremely low interest rate. Investing would be the better plan.

If you are locked in at the new permanent rate. I'd say pay it off asap.

I have $11,620 at 2.625% fixed coming due in about two weeks. Do you think I should create an "untouchable" ~4% internet savings account with enough to pay off the loan in it and just pay it over 10 years, or pay it all off this summer?

In terms of real dollar value, you will come out well ahead if you invest the money and pay it off over ten years. Why? Because thats a bad loan for the lender over the next 10 years. The lender would probably love to see you cut them a $11,620 check.

Edit: The 2.625% is fixed over the 10 years right? Your grace period is up in two weeks I take it?

Here's what I don't understand. If I get 4% interest I'm guessing I'll pay around 30% tax on the gains, which means I'm really only actually getting 2.8% in cash. On $11,620 that's $325 the first year. But I'm paying 2.625% on the loan which is $305. That's $20 net. From tax deductions from paying the interest lets say I get 30% of 2.625% of $11,620. That's $92. So $20+$92=$102. I guess not bad. Before running those numbers I didn't understand quite how much benefit the tax deduction would be. Do my guestimates look correct?

Would the proper conclusion be that as long as I can find a savings account with greater than ~3.75% interest to enable me to essentially pay 0% interest on the loan, I actually make the money on the fact that I can deduct the loan interest from my income? Unless I find a very high % savings account I make minimal profit from the interest itself. Whew.

The 2.625% is fixed over the 10 years right? Your grace period is up in two weeks I take it?

Exactly.

 

[dullard]

You have a few things to think about.

1) Saving money. Student loans are usually at a low interest rate. Thus, if you borrow at a low interest rate and invest into something with a high return, you could save money. However, this contains two big IFs. (A) It only works IF you invest the money and don't blow it. (B) It only works IF you invest the money into something that earns more money than what you pay in interest on the student loan. Few investments are guaranteed, you could easilly put it into stocks and lose money. Just keep that in mind.

2) Being payment free. There is a psychological effect in not owing money. Also not paying a monthly bill saves you time, effort, and costs (stamps, etc). If investing nets you a grand total of $10, was it really worth it for 10 years of paying bills and being in debt? Probably not. Sometimes you have to include the value of having a simple life. Of course, if investing nets you $10,000, then you'd really have to value simplicity to make it worth it to pay off the bill early.

3) Credit. What if you need future loans (car loan, mortgage, etc)? Sometimes it is best not to have too much money borrowed (you could be denied for things later). If you blew your money and still had student loans, you may not be able to borrow enough in the future. Paying off the student loans now would prevent that scenerio.

4) Taxes. You only get a deduction. And you only get a deduction if your income is fairly low. I mistakenly thought I would get tax savings on my student loan. That is, until I realized I was well above the income limit.

It all comes down to your self-control. Yes, with good self-control, and good investing, you are probably better off keeping the student loan. If you don't have self-control or if you won't invest well, or if you value having a debt free life, then pay it off. We probably aren't talking much money anyway you cut it.

Myself, instead of paying off my ~3% loan, I put the money into a house and saved myself from paying 6% on the house mortgage. Student loans are usually good to keep.

 

[Dacalo]

Student loan rates tend to be very low, so check on this first. I am sure it is much lower than say, 5.05% Emigrant Direct is offereing. Here is what I did when I got out of college:

1) My student loan's rate was really low, so I just paid the minimum.

2) I used extra cash to build a reserve in savings at ING Direct and Emigrant. I didn't have any other debt, so this was pretty easy.

3) Once my cushion was built, I paid off the loan pretty quickly.

4) Once my loan was paid off, I started to invest.

 

[Wreckem]

Originally posted by: dullard
You have a few things to think about.

1) Saving money. Student loans are usually at a low interest rate. Thus, if you borrow at a low interest rate and invest into something with a high return, you could save money. However, this contains two big IFs. (A) It only works IF you invest the money and don't blow it. (B) It only works IF you invest the money into something that earns more money than what you pay in interest on the student loan. Few investments are guaranteed, you could easilly put it into stocks and lose money. Just keep that in mind.

2) Being payment free. There is a psychological effect in not owing money. Also not paying a monthly bill saves you time, effort, and costs (stamps, etc). If investing nets you a grand total of $10, was it really worth it for 10 years of paying bills and being in debt? Probably not. Sometimes you have to include the value of having a simple life. Of course, if investing nets you $10,000, then you'd really have to value simplicity to make it worth it to pay off the bill early.

3) Credit. What if you need future loans (car loan, mortgage, etc)? Sometimes it is best not to have too much money borrowed (you could be denied for things later). If you blew your money and still had student loans, you may not be able to borrow enough in the future. Paying off the student loans now would prevent that scenerio.

4) Taxes. You only get a deduction. And you only get a deduction if your income is fairly low. I mistakenly thought I would get tax savings on my student loan. That is, until I realized I was well above the income limit.

It all comes down to your self-control. Yes, with good self-control, and good investing, you are probably better off keeping the student loan. If you don't have self-control or if you won't invest well, or if you value having a debt free life, then pay it off. We probably aren't talking much money anyway you cut it.

Myself, instead of paying off my ~3% loan, I put the money into a house and saved myself from paying 6% on the house mortgage. Student loans are usually good to keep.

They were good to keep. Anyone that has low a interest rate should keep them because they do come out better in the long, if only in terms real dollar value, now more than that depends on how well you invest. However, new student loans are locked in at 6.8% and its better to pay them off asap. Personally Im going to start paying on them before I finish school. My goal is to graduate with only one semesters worth of debt(~$5k), and pay that off before the grace period ends.

 

[LS20]

Originally posted by: dullard
You have a few things to think about.

2) Being payment free. There is a psychological effect in not owing money. Also not paying a monthly bill saves you time, effort, and costs (stamps, etc). If investing nets you a grand total of $10, was it really worth it for 10 years of paying bills and being in debt? Probably not. Sometimes you have to include the value of having a simple life. Of course, if investing nets you $10,000, then you'd really have to value simplicity to make it worth it to pay off the bill early.

biggest factor for me personally. eff loans/installment credit. most of the time, a few percent here to offset a few percent there ends up with very, very little net gain. gotta check on your investments, make sure theyre performing okay, gotta be mindful of the loan payments. peace of mind is worth much more than a few Ks, which i can easily and regularly end up blowing on a whim (hot deals forum = bad). you shouldnt have big loans in your life aside from college and house.. might as well knock one out of the way quickly if possible

 

[newmachineoverlord]

Student loans are low enough interest that you should always just pay the minimum, and spend any extra money in avoiding other, higher interest debt, like credit cards, car loans, and mortgages. If you already have a house, and enough set aside for a new car, plus some more set aside incase of a medical problem/accident/jobloss, then go ahead and pay more towards your student loans. But in reality, consistent payments on your student loans over a period of time will have a longer lasting benefit to your credit rating than simply paying the whole thing off fast. You need a good credit rating because it affects the interest rate on your future mortgage and car loans.

It is unlikely that you will reap any significant benefit from paying off your student loans faster than you have to. The real benefit to not paying them off faster isn't so much the superior return on investments, but rather the availability of more funds to cover unexpected expenses and investments in efficiency. Buy more insulation for your house, get a more fuel efficient car (when your existing car dies), switch to compact flourescent light bulbs, etc. (those investments will yield a higher return than a stock portfolio depending on current efficiency.)

 

[IHateMyJob2004]

Where did Kev go?

 

[Kev]

Originally posted by: IHateMyJob2004
Where did Kev go?

the gym.. did you need something?

 

[AndrewR]

I'm getting about $70,000 from the Air Force next year for separating from active duty, and I'm using it all to pay off my student loans ($98,000 or so), which will leave $20,000 or so from my 4.2% subsidized Stafford consolidated loan. I could take the ~$40,000 from my unsubsidized Stafford at 4.2% and invest that, but I am through with having this crap hanging over my head, which it has been for the last ten years or so. That completely reverses my net worth and will make borrowing for a house much easier, which we plan to do either late next year or early '08.

I may pay off my Perkins loan (~$8K) and keep $8K in the unsubsidized Stafford to pay off early because of the slight interest advantage. I have to sit down and investigate the possible permutations to maximize the use of that lump sum. It'll be nice to solvent again though (until we buy a house!).