The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: maurice197 on January 26, 2014, 06:18:04 PM
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Here's the short version: My wife and I are down to 15k of debt, all in one student loan with a 2.75% interest rate, which costs about 150 bucks a month. We just paid off a school loan and a car loan, freeing up 300 bucks a month. I think we should put that 300 a month into a vanguard account and keep paying off the loan on the current schedule, because paying off the debt would "save us" 2.75%, but we would give up a likely higher rate of return (7-9%?) from the vanguard investment.
agree/disagree? Am I missing anything obvious?
Thank you!
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I would put the extra money in investments. Debt at rates lower than inflation are actually an inflation hedge, and the outstanding amount is pretty low. It's all a matter of personal choice in the end.
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Good job on paying down the debt!
Assuming you have some money in an emergency fund, I would keep the schedule for the low interest student loan and send that car loan money to an investment account. My first choice would be to a 401k/403b/457 depending on what is available and your tax bracket (Roth or traditional).
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I've been churning over the same question, only I have a $13K car loan at 2.79%, and a 28K student loan at 1.875% (I was WAY lucky with the timing on this!). I am pretty set on not paying the student loan off early, but I'm still kind of torn on the car loan, since it's almost a percentage higher, and I'd love to just not have it hanging over my head.
For whatever it's worth, I will probably pay the car off early, but not at the expense of totally eschewing investments. I'm already putting 10% into my retirement account (employer match stops at 5%), and for you, I think it would DEFINITELY be beneficial to be contributing to a pre-tax account if you can, because you're saving the tax AND will probably beat the interest rate on the SL. If you're talking taxed investments, it's not quite as clear cut of a choice. I'm pretty sure that my plan of action on the car note, which is close to the same interest rate as your SL, is to accelerate the payments, but also divert some to taxed investments instead of just throwing all my available surplus at the car loan. This will be beneficial in the long run because the investment will be more of a DCA strategy where I'm putting in a couple hundred a month, instead of dumping 1K or more while continuing to pay off the loan on the amortization schedule.
I don't think I'll pay a cent extra on the 1.875% SL until it's down to a couple thousand bucks and I'm able to pay it off easily in a lump sum.
Also, remember that you get a bit of a tax break on the SL interest, even when you're at a low rate.