0% Interest Debt - Is it still an Emergency??

[bellasf60]

Hello Mustachians!

I am in need of your expertise. I am 23 years old, about a year and a half out of college, working at a company making about $50K a year.  I have two main loans, a $10,000 car loan (I only discovered Mustachianism after I had already made the purchase, d'oh), which I expect to be paying off within the next 6 months and a $14,000 student loan at 0% interest. Yup - 0% interest, it was a revolving loan offered by my school for what was left after my scholarships.

The loan is structured for 10 years at $125 a month. It's not too much of a burden, but the thought of carrying it for 10 years does not really sit well with me. Still I want to do the financially responsible thing and my thought is that, at 0% interest, I'd be better off investing the money and accruing interest on it...

I am also planning on going back to graduate school in 2-3 years and want to be prepared for the expenses that will come along with it.

Any thoughts or advice as to how I should treat my Student Loan would be greatly appreciated. Have any of you had any experience with 0% interest debt? Thanks!!!

[MDM]

... a $14,000 student loan at 0% interest.
...
The loan is structured for 10 years at $125 a month.

bellasf60, welcome to the forums.

Just checking: 10 years = 120 months, and at $125/mo that is $15,000, not $14,000.  Nine years and 4 months would be $14,000...?  But even if you have to pay $125/mo for 120 months, that's only ~1.4% interest.

With either a 0% or 1.4% loan, just pay the $125 each month and get on with the rest of your life. 

Good luck!

[Wile E. Coyote]

... a $14,000 student loan at 0% interest.
...
The loan is structured for 10 years at $125 a month.

bellasf60, welcome to the forums.

Just checking: 10 years = 120 months, and at $125/mo that is $15,000, not $14,000.  Nine years and 4 months would be $14,000...?  But even if you have to pay $125/mo for 120 months, that's only ~1.4% interest.

With either a 0% or 1.4% loan, just pay the $125 each month and get on with the rest of your life. 

Good luck!

I'm guessing that it was originally $15K and there have been 8 payments made so far.

Agreed, I would not pay a dime more than the minimum on that student loan at 0% and invest the rest.

[bellasf60]

Hi everyone - yes it was originally $15K and I have made a few payments.

Thanks for all the great advice!! I will definitely take it and run with it, only paying the minimum monthly payment on the loan. :)

[HairyUpperLip]

I'd prioritize your other life goals, and then attack the student loan once those priorities are handled (Emergency fund, savings, house down payment, wedding, kids, etc)....

Just my opinion though.

[GreenPen]

I am also planning on going back to graduate school in 2-3 years and want to be prepared for the expenses that will come along with it.

Will paying off the 0% loan cause you to take out a new loan (at ~6.8%) when you go back to graduate school?

[Seņora Savings]

The loan is structured for 10 years at $125 a month. It's not too much of a burden, but the thought of carrying it for 10 years does not really sit well with me. Still I want to do the financially responsible thing and my thought is that, at 0% interest, I'd be better off investing the money and accruing interest on it...

I would aggressively pay it off... into a savings account/CDs/stocks depending on your style.  Once you have the $14,000 there you can feel like it's paid off and you can start draining that account to pay the loans, but still get the benefit of the interest.  Doing this, you'll either get an emergency fund or the growth of the stock market out of the deal and the feeling that your debts are paid.

It is an emergency that you have a net worth that is less than $0.  So when you're evaluating purchases, it might be wise to wonder, "Am I really going to spend $100 on drinks when I have literally no money to my name?"

On another note, if you chose to pay it off, you will be taking less money from a school that offered you scholarships and a really generous loan.  The school will presumably use that money to give more students the same opportunities that it gave you.  It's not the chose I would make, but I certainly wouldn't consider it financially irresponsible to do that.

[BaldingStoic]

If it's truly 0% then financially the most prudent course of action is not to pay it off early.  Instead, allow inflation to erode away some of the debt and invest your excess cash into higher yielding accounts based on your risk tolerance.   From a psychological perspective the best course of action is less clear cut.  If being debt-free yields greater peace of mind and happiness for you, then perhaps you should pay it off early.  (You see many Mustachian's  going down this route when paying off Mortgages at rates <4%, while assuming long-term index fund yields equal or above 4%.)  Still at zero percent I'd say you best recourse is to pay it off gradually and invest your money where you get the best return.

[NewStachian]

Just to echo what everyone else is saying here, it's good to identify the difference between "good" and "bad" debt. Good debt is generally debt that has an interest rate (plus inflation) that is less than what your money could be earning elsewhere. So, every dollar you put into a 0% loan could be making you 8% on average in the stock market.

Of course, you always need to approach the problem from a cash flow perspective as well, but at $125 a month, that probably won't be an issue for you. I got a 1% loan, myself, in college and paid that thing off as slowly as I possibly could.