highest interest rate loan you would not pay early?

[August West]

I am trying to decide if it is a good idea to pre-pay a $34k consolidated federal student loan.  The Interest rate is 4.12%. 

Here are the details: 

1. My wife and I will both be maxing out annual 401k and IRA contributions FIRST.

2. I don't have time (with myself and my spouse working while raising 4 kids) to chase real estate deals so the investment would most likely be index funds at Vanguard. 

3.  (if it matters) our only other debt will be mortgage, brand new 15 yr refi @ 2.62%

What interest rate do you use as a guide for keeping or eliminating debt?  As I understand it interest paid on student loans is tax deductible but not principle?

thanks in advance,

[August West]

I found this from arebelspy on a similar thread about pre-paying a mortgage:

"That is, if you are planning for an SWR above 1% or so, you shouldnt prepay your mortgage (assuming inflation of 3%)."

I am planning to use 4% SWR, so by this logic I should not pre-pay anything less than 7% - unless there are some huge tax benefits I don't know about?

thanks,

[dragoncar]

I found this from arebelspy on a similar thread about pre-paying a mortgage:

"That is, if you are planning for an SWR above 1% or so, you shouldnt prepay your mortgage (assuming inflation of 3%)."

I am planning to use 4% SWR, so by this logic I should not pre-pay anything less than 7% - unless there are some huge tax benefits I don't know about?

thanks,

ThAts the general framework.  You can get all mathematical and compare after tax rates (you earn 7% but expect to pay 15% taxes vs a 4% loan that is tax deductible at a marginal rate of 30% or whatever).  I think when it gets that close people use their gut with respect to debt tolerance (some just hate having debt, whereas I'd prefer to have a wad of cash I can use to service my debt OR respond to an emergency).

Personally I think I might start paying it off around the 30 year bond rate adjusted upwards by the tax deduction rate because I do own 30 year treasuries as part of my Permanent portfolio.

Edit:  for the records that's around 5.8% now, and I have no debt above that level.

[gooki]

5% is my threshold where I'd repay the debt without question.