Author Topic: Student Loans (Interest and Repayment)  (Read 3645 times)

stevedoug

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Student Loans (Interest and Repayment)
« on: February 19, 2013, 07:28:10 AM »
I've always been a bit confused by the interest on student loans.

My basic question is this: Do I save interest payments by paying off student loan (via federal government) early?

Background:
currently 4 loans, totaling around $8.9k, @ 2.14%
original loan amount around 14k
repayment began in 2006
I have the cash to pay it off, but is that cash better in a properly allocated investment accounts?

TN_Steve

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Re: Student Loans (Interest and Repayment)
« Reply #1 on: February 19, 2013, 07:49:29 AM »
I've always been a bit confused by the interest on student loans.

My basic question is this: Do I save interest payments by paying off student loan (via federal government) early?

Yes.  If, for an extreme example, you were to pay the principal in full tomorrow, you would owe no interest going forward.

Background:
currently 4 loans, totaling around $8.9k, @ 2.14%
original loan amount around 14k
repayment began in 2006
I have the cash to pay it off, but is that cash better in a properly allocated investment accounts?

This is a different question, and it has has been much debated in other threads regarding both student loans and mortgages, but I don't believe that you'll find much dispute with this low of an interest rate.  If you have a 2.14% rate, you can do better with the money by not paying off early.  By investing it (or, even by watching inflation eat away at the value of the principal), you should easily come out ahead.  The only exception is if it really really nags at you to be in debt and you'll sleep considerably better with zero debt, as opposed to 8500 in debt (at 2.14%!) and 8500 invested.

lauren_knows

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Re: Student Loans (Interest and Repayment)
« Reply #2 on: February 19, 2013, 07:50:38 AM »
I've always been a bit confused by the interest on student loans.

My basic question is this: Do I save interest payments by paying off student loan (via federal government) early?


Yes. Interest is calculated either on a daily or monthly basis. So, paying it off early rids you of future interest payments.

Quote
I have the cash to pay it off, but is that cash better in a properly allocated investment accounts?

This is an entirely different question. Most people will think that they can get more than 2.14% gain in the market or other investing avenues. But, if it's a big psychological boon for you to pay it off, by all means do so.

stevedoug

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Re: Student Loans (Interest and Repayment)
« Reply #3 on: February 19, 2013, 07:56:24 AM »
thanks for the clear, quick answers.

I shall sleep pretty well either way ;)

I'd like to keep that 8500 so I can have a more balanced asset allocation in Vangaurd... Many of the funds spoken about on this site have minimums from 5 to 10k. So making a balanced portfolio can require 20 to 40k up front. That 8500 will get me closer to that goal.

Thanks!

Sunflower

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Re: Student Loans (Interest and Repayment)
« Reply #4 on: February 19, 2013, 09:42:39 AM »
If you decide to pay it off anyway, there should be a phrase on your last statement that says something like "$X needed by __ to pay balance in full". Send them a check for that amount by the correct date and your loan should be signed off.

OTOH, if you were planning to make several (smaller) extra payments you usually need to specify clearly (sometimes using a form provided by the loan company) that extra payments are supposed to go to the principal. It doesn't sound like this is your plan but I always think it's worth repeating because not many people realize that sending in extra payments usually just delays the due date of the next one.

Tami1982

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Re: Student Loans (Interest and Repayment)
« Reply #5 on: February 19, 2013, 09:51:21 AM »
OTOH, if you were planning to make several (smaller) extra payments you usually need to specify clearly (sometimes using a form provided by the loan company) that extra payments are supposed to go to the principal. It doesn't sound like this is your plan but I always think it's worth repeating because not many people realize that sending in extra payments usually just delays the due date of the next one.

Seconded.  I had this exact thing happen.  For 8 years I sent small additional payments in with each payment thinking they were going to principal.  I didn't receive statements because it was all online.  When my servicer changed and I received new documents I was shocked to find all those extra payments were just sitting there.  Lingering.  I effectively have no payment due for six months.  So instead of paying any regular monthly payments I am mailing in (can't do it online) a check with a letter specifically stating principal payment until my prepayment "credit" is gone and I'm actually due a payment.