Author Topic: Lock student loan interest  (Read 2372 times)

Scandium

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Lock student loan interest
« on: April 08, 2016, 08:04:47 AM »
So, I have the option to lock in the rate on my ~$40,000 student loan and thought I'd get the boards input. On regular schedule I will pay it off in 2029 some time, so 13 years. The current rate is 2.9% locked until october this year, at which point I can let it float or lock it again.

At the moment the options are (Assuming little change by Oct):
variable: 1.9%
3 year: 1.6%
5 year: 1.9%
10 year: 2.55%

The catch is with a locked rate there is a pre-payment penalty, equal to the difference in the rate if it has gone up (i.e. what the lender looses by me prepaying). But I'm currently just paying the minimum, and with these rates I'm tempted to continue that. And between maxing two 401ks, Roths, mortgage, daycare, kid expenses and bit of other investing there isn't a whole lot extra cash, and I usually find other uses for it anyway. I'll have about 1/3 the loan amount free in cash in Oct, but don't really feel like paying anything extra..?

Tempted to lock in 2.55% for 10 years, which would basically be the end of my loan. Or 1.9% for 5 years, hoping I can kill it at that point if rates are high, or let it ride if they're not? Or do I not have the appropriate amount of debt aversion and should focus on wiping out the loan?

edit: for context we're mid 30s with about $250k invested assets in various accounts. 4 years from freeing up $1500/month from daycare, unless we have another..
« Last Edit: April 08, 2016, 10:42:25 AM by Scandium »

nereo

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Re: Lock student loand interest
« Reply #1 on: April 08, 2016, 08:18:59 AM »
Personally, i would lock it at the 10yr/2.55% rate.  That's ridiculously low for debt, and it's likely that interest will give you a real rate very close to 0% for that 10 year period.

If you are worried about the clause where there's a pre-payment fee, one 'solution' is to set up a dedicated account where you stash money away until it reaches the size of the loan.  That way, should you hit hard times you know there's money ear-marked for continuing to pay down that loan.  It's all mental accounting though.  Since you've already got $250k in investment assets this doesn't seem to be much of a worry for you.

forummm

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Re: Lock student loand interest
« Reply #2 on: April 08, 2016, 08:34:54 AM »
I would lock it in for years. Either 5 or 10. You can just invest that money and get a higher return. And, depending on your income, the interest is tax deductible. I did this for a long time. Eventually I paid off my 2% loan because our income rose above where I could deduct the interest and the balance was only a few grand and that was low enough for me to like the idea of having it paid off more than the extra returns from investing.

nereo

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Re: Lock student loand interest
« Reply #3 on: April 08, 2016, 08:41:22 AM »
OP:  Who are you going with for your student loans?  I have several I'd like to 'lock in' if I could get rates like yours (currently in deferrement, but I'll be leaving deferment at the end fo the year)

Scandium

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Re: Lock student loand interest
« Reply #4 on: April 08, 2016, 09:07:03 AM »
OP:  Who are you going with for your student loans?  I have several I'd like to 'lock in' if I could get rates like yours (currently in deferrement, but I'll be leaving deferment at the end fo the year)

well, might be tricky. This is the Norwegian government student loan program:) The government basically lend students money at their gov bond issue rate, hence why it's so low (also the lowest in history right now). And you get 20 years to pay it off. My loan is larger than normal because of grad school in the US. 

Thanks for the responses. Basically reinforced my thinking, though swayed me more towards the 10 year rate. Even if I have the $15-20k in 5 years to pay it off I'm sure I'd rather invest it then too, rather than on a 2.5% loan!
« Last Edit: April 08, 2016, 09:09:59 AM by Scandium »

stratozyck

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Re: Lock student loand interest
« Reply #5 on: April 08, 2016, 10:10:38 AM »
OP:  Who are you going with for your student loans?  I have several I'd like to 'lock in' if I could get rates like yours (currently in deferrement, but I'll be leaving deferment at the end fo the year)

well, might be tricky. This is the Norwegian government student loan program:) The government basically lend students money at their gov bond issue rate, hence why it's so low (also the lowest in history right now). And you get 20 years to pay it off. My loan is larger than normal because of grad school in the US. 

Thanks for the responses. Basically reinforced my thinking, though swayed me more towards the 10 year rate. Even if I have the $15-20k in 5 years to pay it off I'm sure I'd rather invest it then too, rather than on a 2.5% loan!

GRR! I was reading this thinking - how the heck did he get 2.5%?? I am trying to refinance my loans and the "best" I can get is a 3.2% variable or 5% fixed. At those low rates, make minimum payments! Of course, that shows the moral hazard of lowering the rates.

Any chance the great people of Norway might want to give me the same deal? Heck I'll even pay 3.5%!

forummm

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Re: Lock student loan interest
« Reply #6 on: April 08, 2016, 12:57:03 PM »
OP:  Who are you going with for your student loans?  I have several I'd like to 'lock in' if I could get rates like yours (currently in deferrement, but I'll be leaving deferment at the end fo the year)

well, might be tricky. This is the Norwegian government student loan program:) The government basically lend students money at their gov bond issue rate, hence why it's so low (also the lowest in history right now). And you get 20 years to pay it off. My loan is larger than normal because of grad school in the US. 

Thanks for the responses. Basically reinforced my thinking, though swayed me more towards the 10 year rate. Even if I have the $15-20k in 5 years to pay it off I'm sure I'd rather invest it then too, rather than on a 2.5% loan!

Hey, aren't there negative interest rates in the EU now? Maybe they should be paying you! :)