Author Topic: Pay off low-interest debt early?  (Read 1996 times)

ArbitraryGuy

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Pay off low-interest debt early?
« on: August 24, 2014, 07:12:56 AM »
This is something that has been (mildly) vexing me lately.  We're doing very well financially as DINKs pulling in around $135K before taxes.  We're maxing out our Roth IRAs and 457bs.  Right now, we still have around $1,000 left per month after spending and saving that we're throwing at the following three debts:

$9,030 @ 1.9% (car loan -- this is our first and last new car)
$12,650 @ 2.33% (student loan #1)
$3,628 @ 4.25% (student loan #2)

At the current rate, these should be gone in about two years.  But should we pay them off earlier? 

We have around $35K sitting in an emergency fund/misc savings right now and we'd be willing to throw at most $10K of that at this debt.  (I know that such a large emergency fund is abnormal around here, but please note that this makes us feel much more secure given our job insecurity and past medical problems -- we prefer it no less than $25K of cash on hand to sleep well at night).

Honestly, I'm indifferent between paying it off or right now (or at least a large chunk) versus letting inflation continue to eat away at the value of the principal (especially on the car loan and student loan #1) and paying it off over the next two years.  But, I'm curious as to what others think and if I'm missing something here.

Thanks!

ETA: paying off student loan #2 in a large chunk is probably a no-brainer.  But what about the others?

plainjane

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Re: Pay off low-interest debt early?
« Reply #1 on: August 24, 2014, 07:28:47 AM »
On average mathematically it probably doesn't make sense to pay the sub 2.5% debt off if you are going to invest the difference (not just in cash).  If you keep the money in cash you're just letting something drop in value with inflation while you pay interest on something else that is also dropping with inflation.

So I'd use that 10k more actively and pay some of the SLs down. 

Joshua

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Re: Pay off low-interest debt early?
« Reply #2 on: August 24, 2014, 08:46:45 AM »
I would say at the very least to drop student loan #2 asap. That's a decent first step. I really wouldn't bother paying off a loan with a sub-inflation interest rate. So the car loan I would leave alone. Student loan #1 is the grey area. Although I would say that even that loan is sub-inflation.

I vote to drop student loan #2 and stick the extra money after that into a good vanguard fund.

Calvawt

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Re: Pay off low-interest debt early?
« Reply #3 on: August 24, 2014, 10:09:28 AM »
Definitely agree to pay off student loan #2.  I would probably put the rest of the $10k towards student loan #1, but that is just because I remember the feeling I got when I paid mine off (not to mention the cash it freed up each month).  I think you could go either way and it should be based on your risk tolerance. 

ArbitraryGuy

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Re: Pay off low-interest debt early?
« Reply #4 on: August 24, 2014, 10:48:33 AM »
Many thanks for the input, all.  It looks like the consensus is to pay off student loan #2.  This will be what we do.

Thanks again!