Stafford Loans at 2% - Is it Worth Paying Them Off Quickly?

[Acg]

I just paid off my last private student loan and I now only have stafford loans of about $9,500 left at an incredible 2.05%.

The new moustachian side of me just wants to finish of the last $9,500 as quickly as possible but the interest rate is so low that there really isn't much of a benefit to paying it off early besides peace of mind.

For example, if I want to pay it off in 1 year I will have a monthly payment of $795 and will pay about $101 in interest over the year.  However, it I take 4 years to pay it off I will have a monthly payment of $205 and will pay about $400 in total interest.  So is it really worth it to forgo saving additional funds each month to only save about $300 in interest in the long run?  As you can tell by my tone, I'm obviously leaning towards spreading it out over a few years but I'd love to hear what you have to say.  Thanks.

[plantingourpennies]

Mrs. PoP and I just had this discussion about the mortgage on our main home-slightly higher rate and amount, but similar idea.

We decided on maintaining greater liquidity in hopes of purchasing a mis-priced asset with the extra dough. So the question is-can you find an asset for ~10k that returns better than 2%, has a chance of being available in the next 4 years?

If you think some opportunity like that might come up, put the dough aside in a Ally account that earns ~1% and wait for your opportunity. If you are just gonna spend the money on cars, women, and waste the rest, then you're better off paying the loan in a year.

Best,
Mr. PoP

[shelfins]

I'm in a similar situation, and I'm paying the loan off as slowly as possible & instead putting my extra savings into a Vanguard stock mutual fund, which averages abt a 7% annual return. So basically, I'm borrowing the money from Stafford @ 2% & loaning it back out at 7%. If you have a 401k with an employer match, then putting the money in there will get you an even higher return. Obviously, this isn't for everyone...some people philosophically just want to stay out of debt, & the stock market is unpredictable whereas paying off the loan will give you a guaranteed 2% return. But if you're already leaning towards paying it off slowly, I say go for it, but keep on saving up money, just put it somewhere you can get a better return!

[Apocalyptica602]

Do both!

That's the approach I took, I'm maxing my 401k and Roth IRA, which takes about $23k from my one pocket and puts it in my future pocket.

However I'm holding off on starting a brokerage account because any other spare cent beyond my emergency fund is rapidly paying down my relatively low interest school debt.

So purely mathematically you'd be better off leveraging your loan and investing more. Psychologically most* people would be better off paying down their debt.

I'd say split the difference. Don't completely forego investing and lose out on valuable years of compounding interest.

[Catbert]

I think it depends on what you'd do with the extra $600 a month.  I you'd spend it on dinners out and vacations then you should pay the loan off instead.  If it would allow you max out your 401k/IRA then I'd stretch out the payments. 

If you anticipate a life style change where cash flow would be an issue (i.e. being a SAHP) then pay it off.

I'd pretty much be in no rush to pay-off a 2% loan. 

[Karl]

Good-morning,

Student loans often have a couple benefits that do not happen for other loans.   These include the ability to defer payments on student loans should the need arise (e.g., unemployment) and the disappearance of the loans in the face of certain unfortunate circumstances (e.g., your death).  Thus, my wife and I chose to focus all of our repayment efforts on the mortgage loan, rather than accelerating our payoff of educational loans.

Just a thought,

Karl

[directionseeker]

Hi,

I am leaning towards paying off all my debt in my situation, it gives me a peace of mind when I don't hold any debt.

I am holding a student loan of $2120 at 4.75% now and I think it is better to get that 4.75$ "return" first before I start any investment program.

If you like the feeling of debt free like me, I will say go all out and pay off that loan.

[secondcor521]

In the long run it won't make much difference anyway based on the small size of the loan balance (compared to the cost of the rest of your life, which will be dozens to hundreds of times that amount).

One point to bear in mind is the effect on your taxes of that loan interest.  You may be taking a tax deduction or credit for it; if so, that lowers your effective cost of borrowing, which could affect/reinforce your decision.

[brewer12345]

I had a 8k or so loan at a similar rate and I paid it off early.  I had a mid 6 figure net worth when I did so, so the gain/loss to keeping it was minimal.  However, I would still pay off student loans regardless of the rate for a very simple reason: this is the only form of debt that cannot be discharged in bankruptcy.  In the interest of being safe if the worst happens, I abhor student loan debt.

[CrochetStache]

Pay it off ASAP!

I chose not to pay my student loan off for many of the reasons listed above; tax reduction, the positive trade line on my credit report, I was earning a higher interest on my CDs, small easy payment electronically debited, etc.

After 9.5 years of perfect payments, it was changed to a different servicer and has become a nightmare that is a negative on my credit report and I have had to bring in a lawyer to deal with their breach of contract :(

Sadly incompetence and greed by your loan servicer may very quickly negate any and all positives for not paying off ASAP.

[chucklesmcgee]

So the question is-can you find an asset for ~10k that returns better than 2%, has a chance of being available in the next 4 years?

TIPs or muni bonds can easily best 2%. Chances are a total market mutual fund will as well. I'd wait to pay this sucker off- you're getting richer the longer you wait.

[Dynasty]

I'd spend a small amount extra on the loans, but invest a much larger amount into a brokerage account. Once you get an equal amount set aside as your loan balance you have the money, if needed, to pay them off.

2% interest on a loan is pretty much free.

[rugorak]

There is no right answer. Just right for you. When I was in your shoes I went for paying everything off for the piece of mind. It is one less thing to worry about. It may not make pure mathematical sense but accounting for risk as I view it it did make sense. If I lost a job, had an unexpected cost come up etc it is a lot easier to deal with without having to worry about money going out for a payment every month. As others have said you won't lose out on much either way. So just do what makes you feel better.